Will DOJ Consent Decree Review Obviate Any Rationale for the Music Modernization Act?

Let’s be clear–one reason why there are problems with mechanical licensing in the US is the loophole created by the government consent decrees that block ASCAP and BMI from issuing a “unilicense” for both performances and streaming mechanicals.  I have argued for years that PROs should be allowed to administer existing statutory mechanical licenses for services that they already license on the performance side of the song.  Personally, I think it is the main reason for creating the situation (such as the mass address unknown NOIs) that gets abused by the services like other loopholes.

I’m not alone in making this argument for “bundling” rights to be administered by PROs: According to the Copyright Office Music Licensing Study (pp. 103-104):

“NSAI, for example, opined that ‘[t]he most efficient path to digital service providers obtaining necessary licenses would be to allow the PRO’s to license and collect mechanical royalties;’” “NMPA suggested that bundled rights could be sought directly from the music publishers that own and administer the song in question.   But the PROs suggested that their existing structures could be leveraged to facilitate bundled licensing on a blanket basis, if only the consent decrees were amended.”

My view is that bundling should occur at the pubisher level and also at the PRO level for all publishers who do not license directly.

Remember–streaming mechanicals track the exact same song, the exact same use, the exact same copyright owners, the exact same transactions and the exact same services as the PROs already license on the performances.  The PROs already have the most comprehensive ownership databases for songs and those databases are immediately accessible.  This is likely to remain true for a long time.

The ASCAP and BMI consent decrees have been in place for decades.  We accept them as a fact of life, something of an immovable object.  For example, the only part of the Music Modernization Act that affects ASCAP and BMI relates to changes that these PROs evidently would like to make to the consent decrees but cannot get the Justice Department to address.  (“Part” may be overstated–it’s about 1-1/2 pages out of the 151 page bill.)

But–what we were told at the outset of the MMA is that legislation to sunset the consent decrees would never pass due to the lobbying power of the digital media companies, the broadcasters, and the general business establishments.  The MIC Coalition, in other words.  And supposedly we can’t beat them, so we need to give up on that idea and take what we’re given and like it.  (Good thing that guy was not at the Alamo, the Edmund Pettus Bridge, Thermopylae or the Battle of Britain.  Horatius he ain’t.)  This is, of course, entirely the wrong approach–if that thinking is not the ennui of learned helplessness, what is?  As the Reverend Martin Luther King, Jr. said, “Ultimately a genuine leader is not a searcher for consensus, but a molder of consensus.”

No one considered what would happen if the consent decrees actually went away either entirely or substantially because the DOJ wanted them to.  If that happy event came to pass, I would suggest that there would be little to nothing in the Music Modernization Act of any value or relevance to ASCAP and BMI.  If anything, the collective established by the MMA is or could easily become a direct competitor of all the PROs which is likely why the broadcasters are “positively neutral” on the bill.  I seriously doubt that any of them anticipated the consent decrees might go away.

Makan Delrahim, the new head of the Department of Justice Antitrust Division, may have just obviated any reason why the PROs should support the MMA or perhaps whether the MMA is even relevant.

During a speaking engagement on March 27 at Vanderbilt Law School, Mr. Delrahim gave us some insights into his plans for the ASCAP and BMI consent decrees in a discussion with Professor Rebecca Allensworth.  As reported in Broadcasting & Cable he said:

“As public agencies we need to take a look and see if those consent decrees are still relevant in the marketplace,” which he was clearly signaling was up for debate. “If they have solved the competitive problem,” he said, “they could become anticompetitive tools over time[.   I]f they were not necessarily the best ideas at the time, it doesn’t make a whole lot of sense for them to stay.”

Mr. Delrahim has put his finger right on the problem.  In my view, the consent decrees have become weaponized–for example, the last head of the Antitrust Division was closely linked to Google and after an ostensible review of the consent decrees, suddenly launched into the absurd “100% licensing” episode to the great–albeit short lived–satisfaction of the MIC Coalition.

Not only is there serious competition in the PRO marketplace unlike it was in 1941 when the ASCAP consent decree started, the 2015 SESAC acquisition of the Harry Fox Agency actually demonstrates that if left alone, the marketplace will close the mechanical license loophole that the MMA purports to solve.   There is no longer a need for the consent decrees, rate courts, none of it.

This isn’t to say that the PROs should get an exemption from the antitrust laws, far from it.  But it does mean that the broadcasters, the MIC Coalition and the Digital Media Association should not be allowed to play with the “anticompetitive tools” of the entire consent decree apparatus.

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So it appears that Mr. Delrahim thinks there’s actually a chance that the consent decrees could go away.  If that happens, the PROs will have a golden opportunity to close the mechanical licensing loophole without all of the apparatus of the MMA.  In that new world, the major publishers would possibly not have to continue to use pretzel logic to administer the rights in their catalogs and the PROs could provide coverage on everything else.

And unlike the MMA, that world would actually be getting the government further out of the lives of songwriters.  It would avoid songwriters being beholden to the DiMA fox that would at least financially control the collective’s chicken coop.

It would also put to rest the ridiculous premise that the biggest corporations in commercial history need the government to protect them from songwriters–corporations that are themselves subject to antitrust enforcement, at least in Europe.  And that may be the other shoe Mr. Delrahim could be dropping.

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How to Fix The Music Modernization Act’s Flawed “Audit” Clause

Доверяй, но проверяй

The famous old Russian proverb reminds us to trust but verify.  That’s been the story in the record business since the cylindrical disc.   All the “modernization” in the world will not soothe songwriter’s genetic suspicion of their accounting statements.

The collective to be established by the Music Modernization Act (“MMA”) undertakes the obligation to handle other people’s money.  It quickly follows that those whose money the collective handles need to be able to verify their royalty payments from time to time.  This has been an absolutely standard part of every royalty-based agreement in the music business for a good 50 years if not longer.

But like every aspect of the MMA, one has to always remember that while all songwriters may be equal, some songwriters are more equal than others.  The MMA creates a two tier system–those who opt out of the compulsory blanket license by the mutual agreement of a rights owner and a digital service in the form of a voluntary agreement and those who do not.  Those who do not have this opt-out right appear to receive payment directly from the collective instead of directly from the service–adding another set of hands and transaction costs.  (It must be said that this group receiving payment under the compulsory blanket license will presumably also include those who currently have a voluntary license with digital services that is not renewed it in future.)

The collective undertakes the responsibility of accounting should anticipate concerns of songwriters regarding verifying the accuracy of the statements and payments it renders.  However, the MMA provides no supervisory oversight and in my view has a rather punitive black box clause that allows “unmatched” royalties to be paid on a market share basis to publishers, and then on to their lucky songwriters pro rata.  This suggests that everyone who is in that lucky songwriter’s chain, like managers, business managers and lawyers working on a percentage basis may also get a share of these black box distributions in compensation.

So on the face of it, the MMA creates a relatively large category of people who have an economic interest in the black box.  You can be cynical and think that they have an interest in the black box being as large as possible (meaning the accounting controls are as weak as possible), or you can agree with five-time Grammy winner Maria Schneider that if the “lucky” songwriters actually knew that they were being paid with money that belonged to the “unlucky” songwriters, they would be angry about that unfairness.  Emphasis on the “actually knew”.

Or you could say, let’s not go either direction–let’s set up transparency and controls so that the incentives are properly aligned to create the smallest black box possible.  No publisher needs the writer-relations headache of suspicious minds, and the collective should do what it can to be above reproach.  Here are a couple solutions to increase the trust level:  Add oversight of the collective by the Office of the Inspector General (as a quasi-governmental organand at least  designated by the Copyright Office and operating under the control of the Copyright Office, and also tighten up the audit clauses in the MMA to treat songwriters auditing the collective the same as the collective is treated by the digital services.

The Inspector General

One way to make sure that the collective–a quasi governmental organization in my view–is run honestly is to make it subject to oversight review by one of the U.S. Government’s many Inspectors General.  Rick Carnes of the Songwriters Guild of America suggested this to Rep. Doug Collins at the University of Georgia Artist Rights Symposium in a question from the floor.

For example, the Library of Congress (currently where the Copyright Office is housed) has an Inspector General.  Since the Copyright Office has a lot to do with the creation and periodic review of the collective, they could save themselves a bunch of Freedom of Information Act requests from angry songwriters by having an Inspector General  review the collective annually (or better yet, in real time).

My understanding is that giving an IG jurisdiction over the collective will require some enabling legislation, but I think it’s something well worth looking into.  It would give the songwriters of the world a true-blue fiduciary to represent their interests as well as comfort that they had a line of appeal with some teeth short of expensive litigation.

Audits

The Inspector General is not in the current draft of the MMA, but audits are–both audits of the collective by songwriters and audits by the collective of digital music services.  We’ll focus on audits of the collective in this post.  It should be said that under the current compulsory license now in effect (i.e., pre-MMA), songwriters get no audit right, so the fact that there is an audit right at all is an incremental improvement.

Unfortunately, the MMA’s audit right still keeps songwriters away from auditing the right party–the digital services–and keeps that upstream data away from them.  Plus, all audits under MMA appear to be subject to confidential treatment.  I don’t think there’s a good reason to keep these secret.  If a smart auditor finds a flaw in the collective’s accounting systems, that flaw should be disclosed and there should be an automatic true up of everyone affected.

But first, let’s realize what an “audit” actually is.  It is a term of art in the music business and really means a “royalty compliance examination” which is solely focused on making sure that statements and payments rendered conform to the contract concerned, or in this case, the statutory requirements of the compulsory blanket license.

(It also must be said that as Maria notes, the MMA specifically exempts the collective from any responsibility for incompetent royalty accounting other than “gross negligence”, which usually means blatant indifference to a legal duty or something along those lines–assuming the collective’s board or employees actually have a legal duty to account correctly which it may not.)

The person conducting a royalty audit is typically not a certified public accountant as there is nothing about conducting this examination that requires a knowledge of Generally Accepted Accounting Principles (“GAAP”), financial accounting, or Sarbannes Oxley compliance.  It is, in fact, quite rare for a royalty audit to be conducted by a CPA, and I’ve even had lawyers conduct an audit because the analysis involved is mostly that of contractual, or statutory, interpretation.  Analysis of music industry-specific contracts is typically not part of the training of CPAs.  So even if an auditor is a CPA, the skills needed to conduct the audit are typically learned through on the job training.

What is very common, however, is for someone on the receiving end of the audit to try to require the auditor be a CPA, arguably to increase the cost of the audit on the person owed money.  CPAs often bill at higher rates than do royalty auditors, which creates a disincentive for audits.  What is also common is for lawyers to think that every time they draft a clause about anyone conducting anything having to do with accounting, that they need to limit the person doing that examination to a CPA, because…well, because…  This is what I call stupid lawyer tricks, and the CPA requirement is something that is routinely negotiated away in record deals and publishing deals if you have an ounce of leverage.

Here’s the preamble of the MMA’s audit clause for audits of the collective:’

A copyright owner entitled to receive payments of royalties for covered activities from the mechanical licensing collective may, individually or with other copyright owners, conduct an audit of the mechanical licensing collective to verify the accuracy of royalty payments and distributions by the mechanical licensing collective to such copyright owner

Remember–copyright owners under the compulsory are not allowed to audit the service, although the collective may audit the service.  (And, of course, voluntary agreements are governed by their terms regarding audits and are not subject to the compulsory.)

Limiting the audit right to “copyright owners entitled to receive payments” means that if songwriters have an administration or co-publishing agreement, they will probably not be able to conduct an audit of the collective (even if their administrator or co-publisher is a board member of the collective).  Because the audit is limited to “verifying the accuracy” of prior payments, the audit of the collective will not be able to look “upstream” to the service making the payment and may not be able to look at payments made to the collective, just the payments by the collective.

The audit shall be conducted by a qualified auditor, who shall perform the audit during the ordinary course of business by examining the books, records and systems of the mechanical licensing collective, as well as underlying data, according to generally accepted auditing standards and subject to applicable confidentiality requirements prescribed by the Register of Copyrights…

Sounds good, right?  A “qualified auditor” is a defined term, however:

QUALIFIED AUDITOR.—The term ‘qualified auditor’ means an independent, certified public accountant with experience performing music royalty audits.

Again, I don’t think that the auditor needs to be both a CPA and have experience.  Experience is enough.  For example, if the auditor has performed audits for members of the collective’s board of directors, perhaps that would be enough.

The qualified auditor shall determine the accuracy of royalty payments, including whether an underpayment or overpayment of royalties was made by the mechanical licensing collective to the auditing copyright owner(s); provided, however, that before providing a final audit report to such copyright owner(s), the qualified auditor shall provide a tentative draft of the report to the mechanical licensing collective and allow the mechanical licensing collective a reasonable opportunity to respond to the findings, including by clarifying issues and correcting factual errors.

This clause is a problem.  First, the auditor is hired–and has a professional duty–to find underpayments of royalties.  That’s what they look for.  The auditor does not have a duty to do the collective’s work for it and find overpayments.  The auditor is not hired to find overpayments, they are hired to find underpayments.

The collective should hire its own accountants to review its royalty statements, and it surely will do so if it gets an audit notice.  Otherwise the US Government is placing a heavy burden on the auditor and the copyright owners to look for overpayments as though the auditor played the role of a public financial accounting firm looking for accuracy on behalf of stockholders.

Plus, the requirement to force that auditor to give the collective the audit report before giving it to the people who hired that auditor is a bit much.  Fair enough to meet and confer at the work paper stage to make sure there weren’t inaccuracies in the analysis, but that should not place any prohibition on whether the auditor’s own client can see the report first.

If this is really the role that the Government wants the auditor to play, then by all means let’s make any miscalculations by the collective available to the public and publish them in the Federal Register.  Let’s not have the auditor’s findings subject to any confidential treatment.  If that brings down a host of other audits or a need to restate millions of royalty payments, then so be it.  Because we are not just looking for underpayments we are searching for the truth, right?

I don’t think so.  And the next part of the audit clause shows why:

The auditing copyright owner(s) shall bear the cost of the audit. In case of an underpayment to the copyright owner(s), the mechanical licensing collective shall pay the amounts of any such underpayment to the auditing copyright owner(s), as appropriate. In case of an overpayment by the mechanical licensing collective, the mechanical licensing collective may debit the accounts of the auditing copyright owner(s) for such overpaid amounts, or such owner(s) shall refund overpaid amounts to the mechanical licensing collective, as appropriate.

Like so many other parts of the MMA, this is essentially an “ad terrorem” clause, or a right coupled with a penalty if it is exercised.  What I think this means is that regardless of how much the underpayment might be–including both a material and nonmaterial amount–the songwriter bears 100% of the cost of the audit.  The songwriter’s auditor has to look for overpayments (and bill their client for that extra review), and if the auditor finds any, the auditor has to report the overpayment.  The songwriter then not only has to repay that amount (whatever “as appropriate” means), but also pay for the expense of finding it.

Compare this to the rights of the collective when auditing a digital music service:

The mechanical licensing collective shall pay the cost of the audit, unless the qualified auditor determines that there was an underpayment by the digital music provider of 10 percent or more, in which case the digital music provider shall bear the reasonable costs of the audit, in addition to paying the amount of any underpayment to the mechanical licensing collective. In case of an overpayment by the digital music provider, the mechanical licensing collective shall provide a credit to the digital music provider.

So what’s good for the goose is not good for the gander.  When the collective is auditing upstream, the collective gets the benefit of that standard underpayment penalty.  That means that the service has to pay for the cost of the audit if the underpayment exceeds a fixed percentage, in this case 10%.  If there is an overpayment, the collective never has to repay the overpayment, just credit the account with an offsetting amount.

There should be no obligation on the part of the songwriter to have to find overpayments and if an overpayment is found in the normal course, it should simply be credited (which is the effect of the collective’s audit clause on songwriters downstream).

Songwriters should get the same underpayment protection on audit costs that the collective enjoys.

Appointing an Inspector General and cleaning up the audit clause would certainly make the MMA more fair for songwriters than it currently is.

 

Let’s Not Miss An Opportunity to Include Startups in the Music Modernization Act

If you’re one of the small group that has actually read the Music Modernization Act, I think you’d have to come away with the idea that this is legislation by the big boys for the big boys.  Nowhere is this unfortunate flaw more apparent than in the way that digital media companies are treated.  No wonder Digital Media Association (Amazon, Apple, Google, Spotify) and the Internet Association (Amazon, Facebook, Google, Spotify) love it so much.

The Music Modernization Act creates two main bodies around the new government-mandated blanket license:  The “collective” which is to represent those with songs to be licensed and the “digital licensee coordinator”.  Both these bodies are supposedly designated by the Register of Copyrights (the head of the U.S. Copyright Office), but the Register is constrained by statute to appoint certain types of entities or people.

One of those criteria is very majoritarian–and I would suggest that in both cases the math alone limits the choice to one entity.  Here’s the relevant language for the collective:

“is endorsed by and enjoys substantial support from copyright owners of musical works that together represent the greatest share of the licensor market for uses of such works in covered activities, as measured over the preceding 3 full calendar years;”

And here’s the relevant language for the “digital licensee coordinator”:

“is endorsed by and enjoys substantial support from digital music providers and significant nonblanket licensees that together represent the greatest share of the licensee market for uses of musical works in covered activities, as measured over the preceding 3 full calendar years”

So one thing seems true for both the collective and the coordinator:  they can only be entities designated by at least a plurality if not a majority of their respective markets on either side of the same coin.  I’m not quite sure how that definition presents a choice to the Register–more like it dictates the choice to the Register.  (How can there be two pluralities much less two or more?)

Others have and are writing about the conflict ridden aspects of the collective, so I will focus here on the digital licensee coordinator which is equally, if not more, conflict ridden than the collective.

This is one of the many, many examples of why the Music Modernization Act is really not about modernizing anything, particularly for the digital media companies.  By definition, startups–who are potential licensees most in need of flexible licensing–are excluded from any possibility of becoming the coordinator.  Startups need to be front and center in this process and new legislation is an excellent opportunity to level the playing field for these companies that are no doubt afraid to challenge the incumbents like Google (known for being specially vindictive to any startup that challenges them–see Foundem and the European Union’s antitrust litigation against Google).

The Music Modernization Act is a great opportunity to do something positive for the market rather than continue to reenforce the dominance of the very, very dominant incumbents on the technology side of the house.  Here’s some free advice to Congress:

Go wild.  Require appointing a startup or two or three to the coordinator role.  And if you really want to go truly off the reservation, require one of those startups to be from some place like Austin, Athens, Northern Virginia or Salt Lake.

I know, I know.  Scary things happen when you open the floodgates to new ideas.  But wouldn’t that be real modernization rather than further entrenching encumbents?

As a wise old Member of the Texas Congressional delegation once told me, they get to climb the ladder to the American Dream like everyone else.  What they don’t get to do is pull the ladder up behind them once they get to the top.

EU Songwriters Say Show Me the Plan on Music Modernization Act

The European Composer & Songwriter Alliance has raised an interesting question to Congressman Doug Collins in a recent letter regarding the Music Modernization Act:

A few other questions that are of concern to songwriters: Where is the business plan for the collective? A century of practice is to be changed without even a business plan that the governed have a chance to review?

This is, of course, an excellent point.  The controversial Music Modernization Act creates a new mechanical royalty collective in the U.S. that follows the curious approach of essentially codifying a chunk of what would normally be found in a combination of organizational formation documents, by-laws or a voting agreement.   The bill mandates a fixed number of governing boards and even designates the category of person who can fill board seats, both voting and nonvoting.  (And any change in those boards would literally require an Act of Congress.)

There is considerable detail in the bill about the new collective with two major exceptions:  No one is tasked with creating a business plan for the collective’s operation as the ECSA officers note in their letter to Rep. Collins.  Neither is there any hint at what the initial operating budget would be or what it would cover.

Good news–this is an easy fix.  I would worry that given that it’s government work, a business plan for the collective will come from one of the big consulting firms at a high cost–guaranteeing that no one who is both unconflicted and who has actually done work in the area will come within a county mile of the project.  I am not the right person to ask about the big consulting firms as I’ve found their work product to be consistently worthless over the years.  That brings the joy of consistency, but the disappointment of overpaying for useless work.

The budget should also be established for the first few years, if for no other reason than the digital services are supposed to pay for the collective under the MMA.  If the cost is $100,000,000, you don’t want to find out that the services will only pay $500,000 once the bill is passed and it’s too late.  If there is a meeting of the minds on the operating costs, it’s being kept pretty quiet inside the smoke filled rooms.  If there isn’t a meeting of the minds, DiMA could shut down the collective as fast as a stop payment.

But still, it’s better to have a plan than to have no plan at all which seems to be the current state of affairs–abandoning a “century of practice” as our European friends remind us.

Update on Increased Streaming Mechanical Rates and Frozen Physical/Download Rates

CRB Decision

For more information read here.

The CRJs have not issued a public version of their ruling as yet, but this notice gives the headline rates.

It appears that physical and permanent download mechanicals will continue to be frozen at no more than 9.1 cents minimum statutory.

This appears to mean that the mechanical for “physical phonorecords” and permanent downloads has been frozen since 2009 and will remain frozen until 2022.  “Physical phonorecords” are CDs and vinyl and permanent downloads is iTunes.  These configurations are not nothing and are still about $800 million industry wide in the US alone for the first half of 2017 alone.  And while its declining, that’s still a lot of songs.

 

The Music Modernization Act Could Make One Small Change in Favor of Songwriters: Put the Copyright Office on a Schedule

Readers may be wondering why we haven’t seen a solution to the mass NOI loophole in the controversial Music Modernization Act or otherwise.  (For background, read my article on the subject from the ABA Entertainment & Sports Lawyer last year.)

There is one solution to the NOI loophole problem that is entirely within the power of the Congress to solve immediately–instruct the Librarian of Congress to require the Copyright Office to get the lead out on processing copyright registrations.  The current turn around time is over six to eight months for electronic filing and eight to 10 months for paper registrations! These bureaucratic delays have a disastrous effect on new registrations (usually new releases) that get caught up in the mass NOI loophole because the registration does not appear in the public records of the Copyright Office until the Copyright Office processes a registration.

Ordering the Copyright Office to bust a move is not an ideal long term solution to closing the mass NOI loophole.  It is a solution that commends itself by the speed with which the operational change could be accomplished.  Because it is the Congress requiring a change to the operational efficiency of the Library of Congress, I personally don’t believe this instruction would require anything like an Act of Congress to accomplish, or even regulations.  Surely not even the federal government requires passing a law to order a government agency to accomplish that which they already have the statutory authority to do,  just do it more efficiently.  The issue could probably be solved with a phone call, strong letter to follow.

It’s fair to say that songwriters should accept as a given that the Congress does not intend to fix the mass NOI problem.  To my knowledge, there has been no official discussion of the issue by any Member of Congress, much less the Copyright Office itself, and the Music Modernization Act doesn’t solve the problem, either, at least not retroactively.    But this shouldn’t surprise anyone because the Congress and the Copyright Office also forgot to raise the mechanical royalty rate from 1909 to 1978–sixty nine years.  And has frozen the mechanical rate for physical and downloads at 9.1 cents for thirteen years.

Failure to address the loophole will hand DiMA companies like Google, Spotify, Amazon and Pandora a sobering royalty free windfall for the period April 2016 to the effective date of the MMA.  The least Congress could do is to require the Copyright Office to start processing copyright registrations in 10 business days.  And start that schedule immediately.  

If the Copyright Office fails to process registrations in that time, there should arise after 10 business days a rebuttable legal presumption that the registration was properly filed until such time as the copyright owner filing the registration receives a conformed registration or a rejection from the Copyright Office.  The contact information for the copyright owner of the pending registration could easily be placed in a searchable database so that those wishing to file NOIs under the current regime–all 60 million or so–could be found and removed from the loophole.  So praesumptio iuris tantum to you, too.

A music user and putative compulsory licensee could challenge the presumption of a valid registration if they were sued before the registration were approved (which of course they would and do anyway as a matter of drill).  But they would still send their notice, accountings and payment to the copyright owner at the address in the new “public records” of the Copyright Office.

It’s important to note that the loophole is based entirely on whether the copyright owner is identifiable in the public records of the Copyright Office–not whether the copyright owner actually owns the copyright or has filed a registration.  It is merely coincidental that the registration is the easiest way to get into the public records of the Copyright Office.  Therefore, it is entirely appropriate that the Copyright Office include contact information from “work in progress” registrations in a more searchable format–the filing itself is arguably in the public records already as it could no doubt be obtained with a Freedom of Information Act request.

The current situation where the Copyright Office simply sits on a registration for an unlimited period of time–thus preventing the registration from appearing in the “public records” of the Copyright Office and inserting new song registrations into the loophole pool for mass NOIs–is likely unlawful and unconstitutional.  It certainly is for other types of government work like SEC filings in the securities context and parade permits in another free expression context.

Conversely, the Copyright Office promptly processes the mass NOIs while expressly and unilaterally disclaiming responsiblity for verifying whether the NOIs were filed properly.  The Copyright Office tells songwriters that their sole remedy is to sue (37 CFR Sec. 201.18(g)):

If any issue (other than an issue related to fees) arises as to whether a Notice filed in the Copyright Office is sufficient as a matter of law under this section, that issue shall be determined not by the Copyright Office, but shall be subject to a determination of legal sufficiency by a court of competent jurisdiction.

This seems to be a violation of due process on its face.

If this new solution for the government’s responsibility to copyright owners would cost money, never fear.  The Copyright Office is enjoying a financial windfall in the form of millions of dollars in filing fees for mass NOIs that should cover these costs.  Or the Congress could simply increase the Office’s budget to bring it into compliance with common sense if not its Constitutional responsibilities.  What the Office should be barred from doing is increasing the filing fees for basic copyright registrations simply because they have to pick up the very sleepy pace.

And by the way, I recall that the Constitution says something about due process and the government’s effective annexation of property rights by an unmovable government agency. The Copyright Office has had two years to fix this problem which is entirely within their operational control.  Failing to do so, Congress could act–without an Act of Congress.

Somebody needs to pick up the phone, strong letter to follow.

Why Does the Music Modernization Act Fail to Deal with Mass NOIs?

MTS readers will recall what I’ve called the “mass NOI” problem–the flawed loophole in the Copyright Act created in 1976 that the biggest digital services have turned into a cottage industry to avoid embracing comprehensive song licensing on their services.

In a nutshell, the government takes away a songwriter’s property right to control how their songs are exploited and forces songwriters to allow those songs to be reproduced and distributed by others.  This is a Bill of Rights constitutional issue because the government is prohibited by the 5th Amendment from taking property from citizens without just compensation.

The compensation in the case of the compulsory mechanical license is that the government requires the user to comply with certain requrements that increase the likelihood that the songwriter will know of the use and have the ability to chase the royalty that the government also sets as part of the “just compensation” for taking away those rights.  (Professor Richard Epstein wrote a highly influential and must-read book on the subject of “takings.”)  Thus you have the quid–the compulsory license–and the pro quo–the obligation to notify, account and pay royalties.

The government froze the mechanical royaly from 1909 to 1978 and again in 2009 for no apparent reason, but that’s another story.   Aside from the inexplicable failure of the controversial Music Modernization Act to modernize the 2009 freezing of the mechanical rate.

After the class actions filed by David Lowery and Melissa Ferrick in December 2015 and January 2016 respectively, Amazon, Google, Spotify, Pandora and others suddenly became very interested in a loophole in the Copyright Act relating to filing these notices.  If they can’t “find” the copyright owner in the public records of the Copyright Office, then these services can send their notice of intent to use (or “NOI”) to the Copyright Office and receive a rebuttable compulsory license–without the obligation to pay royalties until the copyright owner became identifiable in the Copyright Office records.

Sounds reasonable, right?  Wrong.  What may have seemed reasonable in 1976 is certainly not in 2016 or now.  Note that the obligation isn’t to find the copyright owner, the obligation is only to find the copyright owner in the public records of the Copyright Office.  The most common way for song owners to end up in those public records is by registering their songs which they are not obligated to do unless they want to sue for statutory damages and attorneys fees under the Copyright Act’s “private attorney general” provisions.  Certainly no foreign owner is obligated to register as that is a clear violation of international law.

As MTS readers know, the digital services, many of whom are represented by the Digital Media Association or the MIC Coalition, began filing these notices at the Copyright Office at a rate of millions of notices per month.  There is a growing belief that none of these services are actually attempting to find the copyright owners at all, they are simply serving all these notices on the Copyright Office.  The party in the best place to determine the legitimacy of these notices is, of course, the Copyright Office itself, which has not lifted a finger that I can see to even confirm if a sample of these notices have been correctly filed.

Now comes the Music Modernization Act (“MMA”) which has a golden opportunity to clean up the past and to require retroactive payment of royalties on all these notices–no black box required because each song has already been identified and no royalties have been paid at all to date.

Unfortunately, the MMA does nothing that I have been able to find to address the some 60 million of these notices that have been served on the Copyright Office other than to say that the MMA’s blanket license would govern and that:

previously filed notices of intention will no longer be effective or provide license authority with respect to covered activities; provided, however, that there shall be no liability pursuant to section 501 [for infringement] for the reproduction or distribution of a musical work (or share thereof) under a validly filed notice of intention through the license availability date [Jan 1 following the second anniversary of the passing of MMA].

No retroactive payment, no review of the mass NOIs, nothing except a sweep of the magic wand from Washington–because they’re here to help.  Absolution for all involved.

This is simply wrong.  The solution to the issue is to freeze the mass NOIs (since they like freezing royalties so much), review what harm has been done, and enact suitable regulations to provice the legitimate safety valve that the Congress intended in 1976.  The fact that Members didn’t anticipate the loophole seeking behavior should not be bootstrapped into a payday holiday for companies with a combined market cap of over $2 trillion in the business of search.  Otherwise, the government is rewarding loophole seeking behavior and abusing the 5th Amendment protection from takings of property without just compensation–property that is itself created by the same Constitution in the case of copyright.

But the MMA misses this opportunity to right a wrong.   As songwriter Guy Forsyth said in his iconic “Long Long Time,” Americans are freedom loving people and nothing says freedom like getting away with it.