Category: The MLC

Who’s Coming to Lunch? What Do Personnel Changes at Copyright Office Mean for MLC?

If you’ve been following the news lately, you’ll have heard that President Trump has made some personnel changes at the Library of Congress and the head of the U.S. Copyright Office (styled as the “Register of Copyrights”). When the dust settles we’ll see if these changes stick, but my bet is they probably will. This is because the President was probably within his authority to replace the Librarian of Congress (a presidential appointee). Remember that the Librarian is a “principal officer of the United States” who ultimately reports to the President. We’ll come back to that point.

Because the Librarian appoints the head of the Copyright Office for an unspecified term and can terminate that person, there’s probably an argument for the President being able to terminate the “Register” directly if there’s a vacancy in the Librarian’s office especially if there’s urgent business before the Copyright Office. Alternatively, there’s definitely an argument for the replacement Librarian, “Acting” or otherwise, to be able to terminate the non-Senate confirmed Register. (See a similar argument from Professor Volokh.)

So whatever the sequence, the result is likely the same. Was it prudent? No. Was it well-handled? No. Is it enforceable? Quite probably. That doesn’t mean that those who are terminated can’t or shouldn’t pursue claims, but I think it does mean that their respective replacements are going to take over. The topic that is front and center in most discussions of these movements is Big Tech’s lobbying on AI and that is well to be concerned about because today is Wednesday and Big Tech is still trying to screw us. In that regard it is a day like any other.

But there is other pending business before the Copyright Office that will now be supervised by a Department of Justice lawyer with an entirely different background and set of relationships to all prior Registers. My bet is that the culture at the Copyright Office is about to change. I would say change radically, but I’d be skeptical that anything in Washington changes radically. For example, remember that the Library of Congress/Copyright Office public database apparently uses an older Oracle database system and/or COBOL or PL/SQL for data processing.  The user interface is HTML with embedded JavaScript, and uses CGI or early Java-based web tools for query submission. That’s right–1998 technology. Helloooo DoGE.

One item of pending business is the 5-year redesignation oversight review of the MLC’s operations and a review of the MLC’s investment policy on the $1.2 billion black box (or more) that is gradually inching its way toward a market share distribution with little or no explanation.

For reasons known only to the lobbyists who wrote Title I of the Music Modernization Act, the Copyright Office was given oversight of the MLC and its hedge fund.   As anyone could have predicted who’d studied the culture of the Copyright Office for five minutes, that oversight is effectively meaningless.  The MLC has just refused to allow any transparency over their hedge fund—over a billion dollars of other people’s money—and the Copyright Office so far has let that happen.  As Guy Forsyth wrote, Americans are freedom loving people and nothing says freedom like getting away with it.

So there’s a deeper structural issue with the MLC’s oversight: the Copyright Office is required to review the MLC every five years, but it has no real enforcement powers other than refusing to redesignate the quango which would create a huge disconnect between the sunny narrative of aspirations for the “historic” Title I of the MMA that created the MLC and the dark underbelly of the utter failure of that legislation that no one talks about at parties. Unlike executive agencies like the DOJ, FTC or SEC, the Copyright Office can’t subpoena records, issue fines, or force compliance. Its first five-year review—launched in January 2024—is now grinding on in its second year, with no public recommendations or reforms issued to date despite the requirements of the moment.

With an emphasis on regulatory accountability, the Trump administration might push for more rigorous oversight of the MLC’s operations, including its data practices and how it invests the black box OPM funds. Oversight could be enhanced through a combination of Copyright Office audits and a potential executive branch role—such as a streamlined agency focused on government efficiency. The goal: protect creators’ money and ensure the MLC’s compliance without increasing taxpayer burden. Costs for such oversight could, and arguably should, be charged back to the MLC which is funded by the richest corporations in commercial history.

In fact, beefing up the Copyright Office’s oversight role may actually be required. As Professor Volokh observes:

The answer appears to be that the Library of Congress is actually an Executive Branch department for legal purposes [and not in the Legislative Branch], though it also provides some services to Congress. Indeed, I think it has to be such a department in order to have the authority that it has over the implementation of copyright law (via the Register of Copyrights): As Buckley v. Valeo (1976) made clear, in a less famous part of its holding, Congress can’t appoint heads of agencies that exercise executive powers.

Of course the Librarian has to be confirmed by the Senate, although under vacancies rules, an acting Librarian has pretty much the full authority of the office for 210 days without Senate confirmation. The Register is not Senate confirmed, so there’s an odd juxtaposition where Trump’s Acting Librarian could be replaced, but the Register is not subject to the 210 day clock.

This is all down in the weeds in Appointments Clause land. But you get the idea. Paul Perkins, who was serving as an Associate Deputy Attorney General at the U.S. Department of Justice, will soon be looking at the MLC. My understanding is that Mr. Perkins is the deputy of Todd Blanche, who is now taking over as acting Librarian. (Todd Blanche who currently serves as the 40th United States Deputy Attorney General, having been confirmed by the Senate. He was formerly a partner at Cadwalader and former federal prosecutor in the SDNY.)

And just wait til DoGE gets a load of that COBOL programming and a billion dollar hedge fund at a quasi governmental agency. Remember, the Presidential Signing Statement for the Music Modernization Act–signed by Trump 45–specifically designates the MLC board members as inferior officers of the United States. That means on a certain level that they report to the Librarian, a new twist for music business executives. If it comes to a showdown between Trump and the MLC, my money is on Trump. So there’s that.

Time will tell. But one thing is certain: The DOJ lawyer coming in to supervise the entire situation is unlikely to care whether he’ll ever have lunch in that town again.

Blowing up the Compulsory in Washington DC

There is loose talk these days about something called “blowing up the compulsory” license for songs in the US under Section 115 of the Copyright Act. This is odd. It is particularly odd given that a lot of the same people now trying to find a parade to get in front of were the very people who championed–barely five years ago–the bizarre and counterintuitive Title I of the Music Modernization Act (aka the Harry Fox Preservation Act). Title I was the part of the MMA legislation that created the Mechanical Licensing Collective and invited Big Tech even further into our house. (Don’t forget there were other important parts of what became the MMA that were actually well thought out and helpful.)

The geniuses who came up with Title I are also the same people who refused to include artist pay for radio play in the package of bills that became the sainted MMA back in 2018. So at the very least before anyone takes seriously any plan to “blow up the compulsory”, the proponents who want buy-in on that change in policy can get right with history and atone by declaring their support–vocal support–for artist pay for radio play. This would be supporting the American Music Fairness Act recently introduced in this Congress by our allies Senator Blackburn and Rep. Issa and their colleagues.

It is important to realize that “blowing up the compulsory” cannot be a shoot-from-the-hip reaction to Spotify taking advantage of the gaping bundling loophole left wide open in the highly negotiated streaming mechanical settlement under Phonorecords IV. There are too many factors in that big a shock to the system. Songwriters around the world should not get caught up in throwing toys out of the pram along with 100 years of licensing practice just because they made a bad deal. This is particularly true given that the smart people handed over the industry’s bargaining leverage against Big Tech as part of the MMA debacle in return for what? Allowing Spotify’s public stock offering to go forward on schedule? Another genius move by the smart people. I wonder what they got out of that deal? I mean this stock offering, you know, the one that made Daniel Ek a billionaire:

A good thing we didn’t let another MTV build their business on our backs.

It is also important to recognize the obvious–the compulsory is not really a compulsory, it’s a compulsory in the absence of a negotiated direct agreement such as the one that Universal recently made with Spotify. Copyright owners have always been free to make direct deals with music users. The compulsory is not just a license, it is also a compulsory rate that casts a long commercial shadow over even the big industry negotiations and certainly over rates in the rest of the world.

And for reasons of historical accident those rates are not determined in Nashville, or New York, or Los Angeles, or even Austin, but rather in Washington, DC in front of the Copyright Royalty Board–an agency that itself is on pretty shakey Constitutional grounds after a Supreme Court decision in the 2020 Term. So if we’re going to “blow up the compulsory”, maybe a good place to start is not having lobbyists make these decisions.

Even if the former opponents of artist pay for radio play come to their senses and support fundamental fairness for artists, that’s just a good start. We have to acknowledge that “blowing up the compulsory” is not going to be well received by the streaming services for starters. (Not to mention the labels.) Those would be the same streaming services that the smart people invited into our house by means of underwriting the costs of the Mechanical Licensing Collective.

I don’t know how others feel about it, but I for one am not inclined to go to the mattresses to assuage the multimillion dollar whiplash that the services must feel. We should understand that Big Tech are being asked to abandon their intensely successful lobbying campaign that led songwriters and publishers right down the garden path with the MMA. Not to mention the millions they have spent creating the MLC so the MLC could pass through some of those monies to HFA.

Before Congress goes along with blowing up Title I of the MMA, they’re probably going to want an explanation of why this isn’t just another fine mess in a long string of fine messes. That will probably involve a study by the Copyright Office like the one the Office was asked by a songwriter to conduct as part of the MLC’s five year review (but declined to undertake at that time). Fortunately that five year review is still dragging on over a year after it started so this would be a perfect time to launch that study. Perhaps Congress will instruct them to do so? At this rate, it will be time for a new five year review before the first one gets completed, so as usual, time is not a factor.

Even if the services and Congress would go along with “blowing up the compulsory” what does that mean for the MLC and the sainted musical works database? Remember, the lack of a database was the excuse that services relied on for years for their sloppy licensing practices. The database was the fig leaf they needed to avoid iterative infringement lawsuits for their failure–or the failure of the services outside licensing consultants.

It also must be said that the services were invited by the same smart people to spend millions on setting up the MLC. In fairness they have a right to get the benefit of the bargain they were invited to make by the same people who now want to blow it up. Or get their money back. Plus they have to like the leverage they were handed to go to Congress and complain, and complain quite believably with great credibility.

And perhaps most important of all is what happens to the $1.2 BILLION in publicly traded securities that the MLC announced on their 2023 tax return that they are (or at least were) holding in their name? Does that get blown up, too?

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

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

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

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

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

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

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

Budget Transparency

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

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

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

Board Neutrality

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

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

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

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

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

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

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

Investment Policy

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

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

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

Black Box

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

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

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

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

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

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

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

The Intention of Justice:  In Which The MLC Loses its Way on a Copyright Adventure

ARTHUR

Let’s get back to justice…what is justice?  What is the intention of justice?  The intention of justice is to see that the guilty people are proven guilty and that the innocent are freed.  Simple, isn’t it?  Only it’s not that simple.

From And Justice for All, screenplay written by Valerie Curtin and Barry Levinson

Something very important happened at the MLC on July 9:  The Copyright Office overruled the MLC on the position the MLC (and, in fairness, the NMPA) took on who was entitled to post-termination mechanical royalties under the statutory blanket license.  What’s important about the ruling is not just that the Copyright Office ruled that the MLC’s announced position was “incorrect”—it is that it corrected the MLC’s position that was in direct contravention of prior Copyright Office guidance.  (If this is all news to you, you can get up to speed with this helpful post about the episode on the Copyright Office website or read John Barker’s excellent comment in the rulemaking.)

“Guidance” is a kind way to put it, because the Copyright Office has statutory oversight for the MLC.  That means that on subjects yet to be well defined in a post-Loper world (the Supreme Court decision that reversed “Chevron deference”), I think it’s worth asking whether the Copyright Office is going to need to get more involved with the operations of the MLC.  Alternatively, Congress may have to amend Title I of the Music Modernization Act to fill in the blanks.  Either way, the Copyright Office’s termination ruling is yet another example of why I keep saying that the MLC is a quasi-governmental organization that is, in a way, neither fish nor fowl.  It is both a private organization and a government agency somewhat like the Tennessee Valley Authority.  Whatever it is ultimately ruled to be, it is not like the Harry Fox Agency which in my view has labored for decades under the misapprehension that its decisions carry the effect of law.  Shocking, I know.  But whether it’s the MLC or HFA, when they decide not to pay your money unless you sue them, it may as well be the law.

The MLC’s failure to follow the Copyright Office guidance is not a minor thing.  This obstreperousness has led to significant overpayments to pre-termination copyright owners (who may not even realize they were getting screwed).  This behavior by the MLC is what the British call “bolshy”, a wonderful word describing one who is uncooperative, recalcitrant, or truculent according to the Oxford Dictionary of Modern Slang.  The word is a pejorative adjective derived from Bolshevik.  “Bolshy” invokes lawlessness.

In a strange coincidence, the two most prominent public commenters supporting the MLC’s bolshy position on post-termination payments were the MLC itself and the NMPA, which holds a nonvoting board seat on the MLC’s board of directors.  This stick-togetherness is very reminiscent of what it was like dealing with HFA when the NMPA owned it.  It was hard to tell where one started and the other stopped just like it is now.  (I have often said that a nonvoting board seat is very much like a “board observer” appointed by investors in a startup to essentially spy on the company’s board of directors.  I question why the MLC even needs nonvoting board seats at all given the largely interlocking boards, aside from the obvious answer that the nonvoters have those seats because the lobbyists wrote themselves into Title I of the MMA—you know, the famous “spirit of the MMA”.)

Having said that, the height of bolshiness is captured in this quotation (89 FR 58586 (July 9, 2024)) from the Copyright Office ruling about public comments which the Office had requested (at 56588):

The only commenter to question the Office’s authority was NMPA, which offered various arguments for why the Office lacks authority to issue this [post-termination] rule. None are persuasive. [Ouch.]

NMPA first argued that the Office has no authority under section 702 of the Copyright Act or the MMA to promulgate rules that involve substantive questions of copyright law. This is clearly incorrect. [Double ouch.]

The Office ‘‘has statutory authority to issue regulations necessary to administer the Copyright Act’’ and ‘‘to interpret the Copyright Act.’’  As the [Copyright Office notice of proposed rulemaking] detailed, ‘‘[t]he Office’s authority to interpret [the Copyright Act]  in the context of statutory licenses in particular has long been recognized.’’

Well, no kidding.

What concerns me today is that wherever it originated, the net effect of the MLC’s clearly erroneous and misguided position on termination payments is like so many other “policies” of the MLC:  The gloomy result always seems to be they don’t pay the right person or don’t pay anyone at all in a self-created dispute that so far has proven virtually impossible to undo without action by the Copyright Office (which has other and perhaps better things to do, frankly).  The Copyright Office, publishers and songwriters then have to burn cycles correcting the mistake.  

In the case of the termination issue, the MLC managed to do both: They either paid the wrong person or they held the money.  That’s a pretty neat trick, a feat of financial gymnastics for which there should be an Olympic category.  Or at least a flavor of self-licking ice cream.

The reason the net effect is of concern is that this adventure in copyright has led to a massive screwup in payments illustrating what we call the legal maxim of fubar fugazi snafu.  And no one will be fired.  In fact, we don’t even know which person is responsible for taking the position in the first place.  Somebody did, somebody screwed up, and somebody should be held accountable.

Mr. Barker crystalized this issue in his comment on the Copyright Office termination rulemaking, which I call to your attention (emphasis added):

I do have a concern related to the current matter at hand, which translates to a long-term uneasiness which I believe is appropriate to bring up as part of these comments. That concern is, how did the MLC’s proposed policies [on statutory termination payments] come in to being in the first place? 

The Copyright Office makes clear in its statements in the Proposed Rules publication that “…the MLC adopted a dispute policy concerning termination that does not follow the Office’s rulemaking guidance.”, and that the policy “…decline(d) to heed the Office’s warning…”. Given that the Office observed that “[t]he accurate distribution of royalties under the blanket license to copyright owners is a core objective of the MLC”, it is a bit alarming that the MLC’s proposed policies got published in the first place. 

I am personally only able to come up with two reasons why this occurred. Either the MLC board did not fully understand the impact on termination owners and the future administration of those royalties, or the MLC board DID realize the importance, and were intentional with their guidelines, despite the Copyright Office’s warnings. 

Both conclusions are disturbing, and I believe need to be addressed.

Mr. Barker is more gentlemanly about it than I am, and I freely admit that I have no doubt failed the MLC in courtesy.  I do have a tendency to greet only my brothers, the gospel of Matthew notwithstanding.  Yet it irks me to no end that no one has been held accountable for this debacle and the tremendous productivity cost (and loss) of having to fix it.  Was the MLC’s failed quest to impose its will on society covered by the Administrative Assessment?  If so, why?  If not, who paid for it?  And we should call the episode by its name—it is a debacle, albeit a highly illustrative one. 

But we must address this issue soon and address it unambiguously.  The tendency of bureaucracy is always to grow and the tendency of non-profit organizations is always to seek power as a metric in the absence of for-profit revenue.  Often there are too many people in the organization who are involved in decision-making so that responsibility is too scattered.  

When something goes wrong as it inevitably does, no one ever gets blamed, no one ever gets fired, and it’s very hard to hold any one person accountable because everything is too diffused.  Instead of accepting that inevitable result and trying to narrow accountability down to one person so that an organization is manageable and functioning, the reflex response is often to throw more resources at the problem when more resources, aka money, is obviously not the solution.  The MLC already has more money than they know what to do with thanks to the cornucopia of cash from the Administrative Assessment.  That deep pocket has certainly not led to peace in the valley.

Someone needs to get their arms around this issue and introduce accountability into the process.  That is either the Copyright Office acting in its oversight role, the blanket license users acting in their paymaster role through the DLC, or a future litigant who just gets so fed up with the whole thing that they start suing everyone in sight.   

Saint Thomas Aquinas wrote in Summa Theologica that a just war requires a just cause, a rightful intention and the authority of the sovereign (Summa, Second Part of the Second Part, Question 40).  So it is with litigation.  We have a tendency to dismiss litigation as wasteful or unnecessary with a jerk of the knee, yet that is overbroad and actually wrong.  In some cases the right of the people to sue to enforce their rights is productive, necessary, inevitable and—hopefully—in furtherance of a just cause like its historical antecedents in trial by combat.  

It is also entirely in keeping with our Constitution.  The just lawsuit allows the judiciary to right a wrong when other branches of government fail to act, or as James Madison wrote in Federalist 10, so the government by “…its several constituent parts may…be the means of keeping each other in their proper places.”  

That’s a lesson the MLC, Inc. had to learn the hard way.  Let’s not do that again, shall we not?

Chronology: The Week in Review: The Consensus for Conditional Approval of The MLC, Inc. by the @CopyrightOffice

I am pleased to see that there is a consensus against more happy talk among commenters in The MLC, Inc.’s five year review of its operations at the Copyright Office. The consensus is an effort to actually fix the MLC’s data defects, rogue lawmaking and failure to pay “hundreds of millions of dollars” in black box royalties.

The Two Arguments for Conditional Approval

There is a significant group, and sometimes from unexpected corners, who fall into two broad camps: One camp is approve The MLC, Inc. with post-approval conditions that may lead to being disapproved if not accomplished until the next five year review rolls around.

The other camp, which is the one I’m in if you’re interested, is to spend some time now getting very specific about crucial improvements The MLC, Inc. needs to put into effect and payments they need to make. This would be accomplished by bringing in advisory groups of publishing experts, especially from the independent community, roundtables, other customary tools for public consultations, but the redesignation approval would occur only after The MLC, Inc. accomplished these goals.

Either way, the consensus is for conditions if not the timing. I’m not going to argue for one or the other today, but I have some thoughts about why delayed approval is more likely to accomplish the goals to make things better in the least disruptive way.

Remember, once The MLC, Inc. is approved, or “redsignated,” then all leverage to force change is lost. Putting operations-based obligations on The MLC, Inc. to be responsive to their members before they get the valuable approval preserves leverage and will force change one way or another, The reward for successfully accomplishing these goals is getting approved for another term (or the balance of their five year review). Noah built the Ark before the rain.

What if we fired them?

I’m actually pleased to see the consensus for conditional approval. Simply firing The MLC, Inc. would be disruptive (and they know it), mostly because the Copyright Office hasn’t gotten around to requiring that a succession plan be in place so that firing the MLC would not be disruptive.

The simple solution to this pickle is for the Copyright Office to make any redesignation conditioned upon certain fixes being accomplished on an aggressive time frame. I say aggressive because they’ve had five years to think about this; it shoudln’t take long to at least implement some fixes. But if we don’t make it conditional the MLC will lack the incentive to actually fix the problems.

Conditional Approval

I have to say I was encouraged by the number of commenters who said that The MLC, Inc. needs some very definite performance goals. Many commenters said that those goals needed to be met in order for The MLC, Inc. to get approved for another five years until the next quinquennial review. I’m not quite sure how you approve them for another five years with performance goals unless you are really saying what some commenters came right out and said: Any approval should be conditional.

I think that means that the Copyright Office needs a plan with two broad elements: One, the plan identifies specific performance goals, and then two, establishes a performance timeline that The MLC, Inc. must meet in order for this current “redesignation” to become final.

That “conditional redesignation” would incentivize The MLC, Inc. to actually accomplish specific tasks. The timeline will likely vary based on the particular task concerned, but impliedly would be less than five years. There’s a very good reason to make the approval conditional; there’s just too much money involved. Other people’s money.

The Black Box

Every comment I read brings up the black box. Commenters raised different complaints about how The MLC, Inc. is managing or not managing the matching that is required for the black box distribution contemplated by Congress, but they all were pretty freaked out about how big it is, how little we know about it, and the fact that the board of The MLC, Inc. is deeply conflicted because the lobbyists drafted an eventual market share distribution. Strangely enough, there’s every possibility that the market share distribution will happen, or could happen, right after the redesignation. Also known as losing on purpose in a fixed fight.

There’s an easy fix for that one–don’t do the market share distribution, maybe ever.

The harsh but near certain fact is if there is a market share distribution of the black box, the MLC (and everyone involved) will be sued. It almost doesn’t matter how clean it is. So why do it at all? The MLC is supposed to set an example to the world, right? (And we know how much the world loves it when Americans say that kind of thing.) What if we said that the market share distribution was just bloodlust by the lobbyists salivating over a really big poker pot? On reflection, it should be put aside particularly because Congress may not have been told how big the black box really was if anyone knew at the time. Ahem.

The Interest Penalty

This actually goes hand in hand with another interpretation of the black box provisions of Title I which requires the payment of compound interest for black box money to be paid by The MLC, Inc. to the true copyright owner. That compound interest accrues at the “federal short term rate” in effect from time to time (that rate is adjusted monthly and is currently 5.01%). MLC’s interest obligation accrues in an account set up for the true copyright owner’s benefit, not for the recipients of the market share distribution.

Interest runs from the time the unmatched money is received by the MLC until it is matched and paid. There could easily be several different interest rates in effect if the unmatched royalties stay in the black box for months or particularly years. This concept is elaborated in a comment by the Artist Rights Institute.

Title I requires this “penalty” the same way that it requires the statutory late fee which itself has been the subject of much negotiation. It is important to note that the word “penalty” does not appear in Section 115, but both the interest rate and the late fee are obviously “penalties” in plain English. You don’t have to call it a thing a penalty in order for it to be a penalty. It doesn’t stop being a penalty just because the statute doesn’t define it as one, just like a large furry animal with big teeth, big claws, a loud roar and really bad breath who wants to eat you stops being a bear just because it doesn’t have a sign around its neck saying “BEAR”. Particularly when the furry animal has you by throat.

Align the Incentives

I have to imagine that a penalty of compound interest would incentivize both the MLC and the licensees who pay its bills to clear that black box right quick. If a third party is paying the statutory interest penalty which is how it is now according to MLC CEO Kris Ahrend’s testimony to Congress (under oath), then there’s really no incentive for the MLC to pick up the pace on matching and there’s even less incentive for the licensees to make them do it.

It makes sense that the MLC is to maintain an account for each copyright owner (or maybe for each unmatched song since the copyright owner is not matched), so it only makes sense that these accounts and compound interest would be maintained on the ledger of the MLC. It would be pretty dumb to just lump all the money into one account and run compound interest on the whole thing that would have to be disaggregated every time a song is matched. Assuming matching was the object of the exercise.

Plus, there’s nothing in Title I that says that black box money has to be put in a bank account that accrues interest so that the MLC doesn’t have to pay this penalty for being slow. Again, the word “bank” does not appear in Section 115. It definitely doesn’t say a federally insured bank account, a bank in the Federal Reserve system, or the like–because the statute does not require a bank.

Even so, I have to believe that if you want to an insurance company and said I will bring you the “hundreds of millions of dollars” Mr. Ahrend refers to if you write me a policy that will cover my interest expense and insure the corpus, somebody would take that business. If they can write derivatives contracts for fluctuations in natural gas futures, I bet they could write that policy or my name’s not Jeffrey Skilling.

William of Ockham Gets Into the Act

What makes a lot more sense and is a whole lot simpler is that Congress wanted to incentivize the MLC to match and pay black box royalties quickly. Congress established the compound interest penalty to add jet fuel to that call and response cycle.

That penalty is part of the normal costs of operating the MLC therefore should be paid as part of the administrative assessment, i.e., by the services themselves. If the MLC sits on the money too long, the services can refuse to cover the interest costs beyond that point and the MLC can then pass the hat to the board members who allowed that to happen.

So everyone has a good incentive to clean out the black box. Brilliant lawmaking. I don’t think that’s such a bad deal for the services since they are the ones who sat on the money in the first place that produced the initial hundreds of millions of dollars for the black box. They got everything else they wanted in the MMA, why object to this little detail? Let’s try to hold down the hypocrisy, shall we?

There may be some arguments about that interpretation, but here’s what Congress definitely did not do and about which there should definitely not be an argument. Congress did not authorize the MLC to use the black box money as an investment portfolio. Nowhere in Title I is the MLC authorized to start an investment policy and become a “control person” of mutual funds. Which they have done.

That investment policy also raises the question of who gets the upside and who bears the downside risk. If there’s a downturn, who makes the corpus whole? And, of course, when the ultimate market share distribution occurs, who gets the trading profits? Who gets the compound interest? Surely the smart people thought of this as part of their investment policy.

The Key Takeaway

You may disagree with the Institute’s analysis about what is and isn’t a penalty, and you may disagree about the thing of the conditions on approval, but I think that there is broad agreement that there needs to be a discussion about forcing The MLC, Inc. to do a better job. I bet if you asked, the Congress clearly did not see the Copyright Office’s role as handing out participation trophies or pats on the head. And that should not be the community’s goal, either. This whole thing was cooked up by the lobbyists and they were not interested in any help. That obviously crashed and burned and now we need to help each other to save songwriters today and in future generations. If not us, then who; if not now, then when; if not here, then where?

Who Will Get to the Bottom of The Hundreds of Millions of Black Box Money at MLC?

One of the most common questions we get from songwriters about the MLC concerns the gigantic level of “unmatched funds” that have been sitting in the MLC’s accounts since February 2021.  Are they really just waiting until The MLC, Inc. gets redesignated and then distributes hundreds of millions on a market share basis like the lobbyists drafted into the MMA?  

Not My Monkey

Nobody can believe that the MLC can’t manage to pay out several hundred million dollars of streaming mechanical royalties for over three years so far.  (Resulting in the MLC holding $804,555,579 in stocks as of the end of 2022 on its tax return, Part X, line 11.) The proverbial monkey with a dart board could have paid more songwriters in three years.  Face it—doesn’t it just sound illegal?  In my experience, when something sounds or feels illegal, it probably is.

What’s lacking here is a champion to extract the songwriters’ money.  Clearly the largely unelected smart people in charge could have done something about it by now if they wanted to, but they haven’t.  It’s looking more and more like nobody cares or at least nobody wants to do anything about it.  There is profit in delay.

Or maybe nobody is taking responsibility because there’s nobody to complain to.  Or is there? What if such a champion exists?  What if there were no more waiting?  What if there were someone who could bring the real heat to the situation?

Let’s explore one potentially overlooked angle—a federal agency called the Office of the Inspector General.  Who can bring in the OIG?  Who has jurisdiction?  I think someone does and this is the primary reason why the MLC is different from HFA.

Does The Inspector General Have MLC Jurisdiction?

Who has jurisdiction over the MLC (aside from its severely conflicted board of directors which is not setting the world on fire to pump the hundreds of millions of black box money back into the songwriter economy).  The Music Modernization Act says that the mechanical licensing collective operates at the pleasure of the Congress under the oversight of the U.S. Copyright Office and the OIG has oversight of the Copyright Office through its oversight of the Library of Congress.

But, hold on, you say.  The MLC, Inc. is a private company and the government typically does not have direct oversight over the operations of a private company.

The key concept there is “operates” and that’s the difference between the statutory concept of a mechanical licensing collective and the actual operational collective which is a real company with real employees and real board members.  Kind of like shadows on the wall of a cave for you Plato fans.  Or the magic 8 ball.

The MLC, Inc. is all caught up with the government.  It exists because the government allows it to, it collects money under the government’s blanket mechanical license, its operating costs are set by the government, and its board members are “inferior officers” of the United States.   Even though The MLC, Inc. is technically a private organization, it is at best a quasi-governmental organization, almost like the Tennessee Valley Authority or the Corporation for Public Broadcasting.  So it seems to me that The MLC, Inc. is a stand-in for the federal government.

But The MLC, Inc. is not the federal government.  When Congress passed the MMA and it charged the Copyright Office with oversight of the MLC.  Unfortunately, Congress does not appear to have appropriated funds for the additional oversight work it imposed on the Office.  

Neither did Congress empower the Office to charge the customary reasonable fees to cover the oversight work Congress mandated.  The Copyright Office has an entire fee schedule for its many services, but not MLC oversight.  

Even though the MLC’s operating costs are controlled by the Copyright Royalty Board and paid by the users of the blanket license through an assessment, this assessment money does not cover the transaction cost of having the Copyright Office fulfill an oversight role.

An oversight role may be ill suited to the historical role of the Copyright Office, a pre-New Deal agency with no direct enforcement powers—and no culture of cracking heads about wasteful spending like sending a contingent to Grammy Week.

In fact, there’s an argument that The MLC, Inc. should write a check to the taxpayer to offset the additional costs of MLC oversight.  If that hasn’t happened in five years, it’s probably not going to happen.  

Where Does the Inspector General Fit In?

Fortunately, the Copyright Office has a deep bench to draw on at the Office of the Inspector General for the Library of Congress, currently Dr. Glenda B. Arrington.  That kind of necessary detailed oversight is provided through the OIG’s subpoena power, mutual aid relationships with law enforcement partners as well as its own law enforcement powers as an independent agency of the Department of Homeland Security.  Obviously, all of these functions are desirable but none of them are a cultural fit in the Copyright Office or are a realistic resource allocation.

The OIG is better suited to overseeing waste, fraud and abuse at the MLC given that the traditional role of the Copyright Office does not involve confronting the executives of quasi-governmental organizations like the MLC about their operations, nor does it involve parsing through voluminous accounting statements, tracing financial transactions, demanding answers that the MLC does not want to give, and perhaps even making referrals to the Department of Justice to open investigations into potential malfeasance.  

Or demanding that the MLC set a payment schedule to pry loose the damn black box money.

One of the key roles of the OIG is to conduct audits.  A baseline audit of the MLC, its closely held investment policy and open market trading in hundreds of millions in black box funds might be a good place to start.  

It must be said that the first task of the OIG might be to determine whether Congress ever authorized MLC to “invest” the black box funds in the first place.  Congress is usually very specific about authorizing an agency to “invest” other people’s money, particularly when the people doing the investing are also tasked with finding the proper owners and returning that money to them, with interest. 

None of that customary specificity is present with the MLC.

For example, MLC CEO Kris Ahrens told Congress that the simple requirement that the MLC pay interest on “unmatched” funds in its possession (commonly called “black box”) was the basis on which the MLC was investing hundreds of millions in the open market.  This because he assumed the MLC would have to earn enough from trading securities or other investment income to cover their payment obligations.  That obligation is mostly to cover the federal short term interest rate that the MLC is required to pay on black box.

The Ghost of Grammy Week

The MLC has taken the requirement that the MLC pay interest on black box and bootstrapped that mandate to justify investment of the black box in the open market.  That is quite a bootstrap.

An equally plausible explanation would be that the requirement to pay interest on black box is that the interest is a reasonable cost of the collective to be covered by the administrative assessment.  The plain meaning of the statute reflects the intent of the drafters—the interest payment is a penalty to be paid by the MLC for failing to find the owners of the money in the first place, not an excuse to create a relatively secret $800 million hedge fund for the MLC.  

I say relatively secret because The MLC, Inc. has been given the opportunity to inform Congress of how much money they made or lost in the black box quasi-hedge fund, who bears the risk of loss and who profits from trading.  They have not answered these questions.  Perhaps they could answer them to the OIG getting to the bottom of the coverup.

We do not really know the extent of the MLC’s black box holdings, but it presumably would include the hundreds of millions invested under its stewardship in the $1.9 billion Payton Limited Maturity Fund SI (PYLSX). Based on public SEC filings brought to my attention, The MLC, Inc.’s investment in this fund is sufficient to require disclosure by PYLSX as a “Control Person” that owns 25% or more of PYLSX’s $1.9 billion net asset value. PYLSX is required to disclose the MLC as a Control Person in its fundraising materials to the Securities and Exchange Commission (Form N-1A Registration Statement filed February 28, 2023).  This might be a good place to start.

Otherwise, the MLC’s investment policy makes no sense.  The interest payment is a penalty, and the black box is not a profit center.

But you don’t even have to rely on The MLC, Inc.’s quasi governmental status in order for OIG to exert jurisdiction over the MLC.  It is also good to remember that the Presidential Signing Statement for the Music Modernization Act specifically addresses the role of the MLC’s board of directors as “inferior officers” of the United States:

Because the directors [likely both voting and nonvoting] are inferior officers under the Appointments Clause of the Constitution, the Librarian [of Congress] 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.

The term “inferior officers” refers to those individuals who occupy positions that wield significant authority, but whose work is directed and supervised at some level by others who were appointed by presidential nomination with the advice and consent of the Senate. Therefore, the OIG could likely review the actions of the MLC’s board (voting and nonvoting members) as they would any other inferior offices of the United States in the normal course of the OIG’s activities.

Next Steps for OIG Investigation

How would the OIG at the Library of Congress actually get involved?  In theory, no additional legislation is necessary and in fact the public might be able to use the OIG whistleblower hotline to persuade the IG to get involved without any other inputs.  The process goes something like this:

  1. Receipt of Allegations: The first step in the OIG investigation process is the receipt of allegations. Allegations of fraud, waste, abuse, and other irregularities concerning LOC  programs and operations like the MLC are received from hotline complaints or other communications. 
  2. Preliminary Review: Once an allegation is received, it undergoes a preliminary review to determine if OIG investigative attention is warranted. This involves determining whether the allegation is credible and reasonably detailed (such as providing a copy of the MLC Congressional testimony including Questions for the Record). If the Office is actually bringing the OIG into the matter, this step would likely be collapsed into investigative action.
  3. Investigative Activity: If the preliminary review warrants further investigation, the OIG conducts the investigation through a variety of activities. These include record reviews and document analysis, witness and subject interviews, IG and grand jury subpoenas, search warrants, special techniques such as consensual monitoring and undercover operations, and coordination with other law enforcement agencies, such as the FBI, as appropriate.  That monitoring might include detailed investigation into the $500,000,000 or more in black box funds, much of which is traded on open market transactions like PYLSX.
  4. Investigative Outputs: Upon completing an investigation, reports and other documents may be written for use by the public, senior decision makers and other stakeholders, including U.S. Attorneys and Copyright Office management. Results of OIG’s administrative investigations, such as employee and program integrity cases, are transmitted to officials for appropriate action. 
  5. Monitoring of Results: The OIG monitors the results of those investigations conducted based on OIG referrals to ensure allegations are sufficiently addressed.

So it seems that the Office of the Inspector General is well suited to assisting the Copyright Office by investigating how the MLC is complying with its statutory financial obligations.  In particular, the OIG is ideally positioned to investigate how the MLC is handling the black box and its open market investments that it so far has refused to disclose to Members of Congress at a Congressional hearing as well as in answers to Questions for the Record from Chairman Issa.

Taking Away the Punchbowl: Removing Open Market Investments from the MLC

Whenever someone is holding your money, you kind of want to a lot of about it, don’t you? You want to know how much, where they hold it, and when you get it back, right? Seems reasonable. But not only does the MLC hold what is likely to be hundreds of millions in black box money, they don’t really tell you these attributes, do they?

Plus they tell you that somehow the Music Modernization Act authorizes them to invest your money in the open market to obtain some theoretical government mandated rate of return, yet the Copyright Act says nothing of the kind.

They then refuse to disclose how they intend to invest OPM and who bears any losses and makes any profit from these open market transactions. They don’t just refuse to tell songwriters, because why tell them whose money it is, they don’t just refuse to tell the Copyright Office who is tasked by Congress with overseeing their operations, they also dodge answering questions from the very Congressional committee that oversees the MLC.

The other problem is that the longer the MLC delays in distributing the black box to the correct copyright owners, the more likely it is that the MLC will choose the nuclear option–market share distribution to the copyright owners who are overrepresented on the MLC’s board without regard to copyright ownership. And just to be clear what that means, it means the black box money is going to get shared with people who aren’t entitled to it thus leaving lots of hungry people.

Many people believe that this is exactly the intent and that the market share distribution will happen right after the MLC gets redesigned to operate for another five years at the punchbowl. Why? Because when the market share distribution happens it very likely will tip off an aggressive no-shit backlash against the MLC that would likely argue they can’t be trusted with much of anything at all.

It’s entirely possible that if the MLC has been this secretive about the amount of black box money in its grasp, the lobbyists never came clean with Congress about just how much the services were paying for their retroactive safe harbor in the form of undisclosed and unallocated monies. Remember the big scramble to deny a press report that the black box was over $1 billion? Maybe that press report wasn’t so far off after all.

Fortunately, there is a simple solution. Congress needs to take away any control or decision making about the unallocated black box money from the MLC. This could be as simple as a technical amendment forcing the MLC to act in a transparent manner and disclose the current investments of the black box money, any desposits and withdrawals, and to force distributions to occur when claimed by the correct owner.

The entire concept of a market share distribution should be eliminated from the Copyright Act because it creates a perverse incentive not to find the true owners by the people who benefit from the market share distribution. This moral hazard was obvious from the time the lobbyists drafted Title I of the Music Modernization Act and it should come as no surprise that it has failed miserably.

There’s no time like the present to fix it. Decisions about the black box should be taken away from the MLC and placed far, far outside if its orbit of the network of interlocking boards, consultants, accountants and companies surrounding the MLC and its confederates.

Chronology: The Week in Review: MLC Redesignation Proceeding Highlights Ownership Issues for the Government’s Musical Works Database; TikTok’s SOPA Problem; Google’s Nonindemnity Indemnity for AI

One of the few things Congress got right in Title I of the Music Modernization Act is the five-year review of the mechanical licensing collective. Or more precisely, whether the private company previously designated by the Copyright Office to conduct the functions of the Mechanical Licensing Collective should have another five years to continue doing whatever it is they do.

Impliedly, and I think a bit unfairly, Congress told the Copyright Office to approve its own decision to appoint the current MLC or admit they made a mistake. This is yet another one of the growing list oversights in the oversight. Wouldn’t it make more sense for someone not involved in the initial decision to be evaluating the performance of the MLC? Particularly when there are at least tens of millions changing hands as well as some highly compensated MLC employees, any one of whom makes more than the Copyright Royalty Judges.

What happens if the Register of Copyright actually fires The MLC, Inc. and designates a new MLC operator? The first question probably should be what happens to the vaunted MLC musical works database and the attendant software and accounting systems which seem to be maintained out of the UK for some reason.

I actually raised this question in a comment to the Copyright Office back in 2020. In short, my question was probably more of a statement: ‘‘The musical works database does not belong to the MLC or The MLC and if there is any confusion about that, it should be cleared up right away.” The Copyright Office had a very clear response:

While the mechanical licensing collective must ‘‘establish and maintain a database containing information relating to musical works,’’ the statute and legislative history emphasize that the database is meant to benefit the music industry overall and is not ‘‘owned’’ by the collective itself….Any use by the Office referring to the public database as ‘‘the MLC’s database’’ or ‘‘its database’’ was meant to refer to the creation and maintenance of the database, not ownership. [85 FR at 58172, text accompanying notes 30 and 31.]

So if the current operator of the MLC is fired, we know from the MMA and the Copyright Office guidance that one thing The MLC, Inc. cannot do is hold the database and its attendant systems hostage, or demand payment, or any other shadiness. These items do not belong to them so they must not assert control over that which they do not own.

Which would include the hundreds of millions of black box money that the MLC, Inc. has failed to distribute in going on four years. I’ve even heard cynics suggest that the market share distribution of black box will occur immediately following The MLC, Inc.’s redesignation and the corresponding renewal of HFA’s back office contract which seems to be worth about $10 million a year all by itself.

What would also have been helpful would be for Congress to have required the Copyright Office to publish evaluation criteria for what they expected the MLC’s operator to actually do as well as performance benchmarks. Like I said, it’s a bit unfair of Congress to put the Copyright Office in the unprecedented position of evaluating such an important role with no guidance whatsoever. Surely Congress did not intend for the Copyright Office to have unfettered autonomy in deciding what standards to apply to their review of a quasi-governmental agency like the MLC, yet seems to have defaulted to the guardrail of the Administrative Procedures Act or some other backstop to sustain checks and balances on the situation.

But at least the ownership question is settled.

Breaking the Internet Yet Again: TikTok’s SOPA Problem

TikTok users swarmed over the Capitol to protest and impede a Congressional vote that would force the sale of the ubiquitous TikTok. Can Camp Pelosi redux be far behind? Well, no, because this was a digital swarm which is just different, you see. It’s just different when Big Tech tries to protect an IPO.

TikTok’s tactics are very reminiscent of Google’s tactics with SOPA or Napster’s tactics with Camp Chaos.

But not even Napster had the brass to go to full on papal indulgences. Yes, that’s right: NunTok will save the IPO.

Nuns good, TikTok bad!

I wonder which Washington lobbyist thought of NunTok? Perhaps this guy:

Google’s Nonindemnity Indemnity for AI

Some generative AI platforms are trying to make users believe that the company will actually protect them from copyright infringement claims. When you drill down on what the promise actually is, it’s pretty flimsy and may itself be consumer fraud.

Chronology: The Week in Review: Can an independent auditor look for overpayments?; @Helienne Explains the EU’s Cultural Protections Against Streaming Monopolists; @MikeHuppe Comment on AI Justice

The MLC announced it was auditing 49 users of the blanket mechanical license, a massive undertaking. This announcement sent me back to the audit provisions of Title I of the Music Modernization Act to review what the role of the auditor actually is for audits of music users by the MLC as opposed to audits of the MLC by copyright owners. As often happens when reviewing little-used code sections that abruptly become important, I was reminded of a couple nuances that were obviously flawed when drafted. The key nuance is how can a royalty examiner be looking for overpayments against the interest of the party that hired her but still be independent? 

How qualified is qualified?

The first issue is with the definition of a “qualified auditor”, a glitch that I’ve harped on a few times. The term “qualified auditor” comes up in two different contexts in the MMA–first, a qualified auditor who prepares the MLC’s audited financial statements. The definition of qualified auditor is in 17 USC § 115(e)(25) as “an independent, certified public accountant with experience performing music royalty audits.” The reason why this term is a drafting error is two fold–first, you don’t need a CPA to conduct music royalty audits and there is nothing on the CPA licensure exams that requires any knowledge of “music royalty audits.” Second, you do need a CPA to prepare audited financial statements if the books are maintained according to generally accepted accounting principles particularly if a financial audit requires an opinion as an attest service, but that role does not require knowledge of royalty audits. So the defined term has an internal contradiction. 

The Gaap, ruler of 25 legions of spirits from the Munich Manual of Demonic Magic grimoire

Not only is the definition hinky but it’s common knowledge (outside of the Imperial City, I guess) that many if not most royalty auditors are not CPAs. (There’s also a long-standing assumption among artist lawyers when this concept comes up in record or publishing deals that a CPA requirement for audits is intentionally punitive. The assumption is that CPAs charge more making the cost of auditing more burdensome (therefore less likely to happen), which remains to be proven but is pretty widely accepted.) So the definition should be limited to requiring a CPA for the MLC’s audited financial statements and the common alternate definition of “experienced royalty auditor” for the audit clauses. But let’s put that to one side. 

Overpayments and Independence

The MMA rule for auditing digital music providers states:

The qualified auditor shall determine the accuracy of royalty payments, including whether an underpayment or overpayment of royalties was made by the digital music provider to the mechanical licensing collective, except that, before providing a final audit report to the mechanical licensing collective, the qualified auditor shall provide a tentative draft of the report to the digital music provider and allow the digital music provider a reasonable opportunity to respond to the findings, including by clarifying issues and correcting factual errors.

Realize that the MLC and the services monitor payments and make frequent adjustments to royalties (which may be reflected on your royalty statement if you can find them). That’s different than an auditor who works for a client going and seeking out an overpayment as part of their audit report. Relieving the auditor of this conflict does not preclude the service from claiming an overpayment which is an ongoing part of invoicing (see, e.g., 37 CFR §210.27(d)(2)(ii)). You would not be creating a windfall for the party receiving the overpayment.

I would interpret the statute as not requiring the auditor to seek an additional overpayment not previously invoiced, but rather confirming the accuracy of any adjustments made for overpayments or underpayments already reflected on the statements that are the subject of the audit. That’s quite a different thing.

What makes an auditor independent is that they do not have a conflict of interest as to their client, in this case the MLC. The royalty auditor is intended to be an advocate for their client (who pays them) and they are hired to look for ways that the other side has failed to account to their client properly to their client’s disadvantage. Improper payments are most commonly underpayments, i.e., the music user has failed to pay all that the client is entitled to receive. Royalty statements are regularly recalculated for a host of reasons in the normal course of business without regard to the presence or absence of any audit. This is not to say that somehow the MLC (and eventually the copyright owners) get some kind of windfall because the services missed something if any auditor is not seeking out an overpayment. That’s particularly true since there will likely be multiple sets of eyes on the field work and draft audit report. And trust me, they will all be trying to find somebody else’s mistake.

Or said another way, copyright owners don’t receive a windfall that was somehow missed by the largest corporations in commercial history who can determine what floor of which building you are on at what time of day at what address, e.g., sporting goods or children’s toys, so they can serve ads to your phone. Are we really worried about these little lambs getting lost in the woods?

@Helienne Explains the EU’s Cultural Protections Against Streaming Monopolists

We were lucky to get an interview with ESCA President Helienne Lindvall about the European Parliament’s report on cultural protections against streaming monopolies. This is a very important development and something we could use in the United States where this focus is sadly lacking.

@MikeHuppe Made an Important Comment on AI Justice for Creators

SoundExchange CEO Mike Huppe’s comment on AI justice is welcome from a rights platform.

Chronology: The Week in Review: Could Spotify Extend Stream Discrimination to Songs, the No AI Fraud Act, Chairman Issa Has Questions on MLC Investment Policy

Spotify has announced they are “Modernizing Our Royalty System.” Beware of geeks bearing “modernization”–that almost always means they get what they want to your disadvantage. Also sounds like yet another safe harbor. At a minimum, they are demonstrating the usual lack of understanding of the delicate balance of the music business they now control. But if they can convince you not to object, then they get away with it.

Don’t let them.

An Attack on Property Rights

There’s some serious questions about whether Spotify has the right to unilaterally change the way it counts royalty-bearing streams and to encroach on the private property rights of artists. 

Here’s their plan: Evidently the plan is to only pay on streams over 1,000 per song accruing during the previous 12 months. I seriously doubt that they can engage in this terribly modern “stream discrimination” in a way that doesn’t breach any negotiated direct license with a minimum guarantee (if not others). 

That doubt also leads me to think that Spotify’s unilateral change in “royalty policy” (whatever that is) is unlikely to affect everyone the same. Taking a page from 1984 newspeakers, Spotify calls this discrimination policy “Track Monetization Eligibility”. It’s not discrimination, you see, it’s “eligibility”, a whole new thing. Kind of like war is peace, right? Or bouillabaisse.

According to Spotify’s own announcement this proposed change is not an increase in the total royalty pool that Spotify pays out (God forbid the famous “pie” should actually grow): ”There is no change to the size of the music royalty pool being paid out to rights holders from Spotify; we will simply use the tens of millions of dollars annually [of your money] to increase the payments to all eligible tracks, rather than spreading it out into $0.03 payments [that we currently owe you].” 

Yep, you won’t even miss it, and you should sacrifice for all those deserving artists who are more eligible than you. They are not growing the pie, they are shifting money around–rearranging the deck chairs.

Spotify’s Need for Living Space

So why is Spotify doing this to you? The simple answer is the same reason monopolists always use: they need living space for Greater Spotify. Or more simply, because they can, or they can try. They’ll tell you it’s to address “streaming fraud” but there are a lot more direct ways to address streaming fraud such as establishing a simple “know your vendor” policy, or a simple pruning policy similar to that established by record companies to cut out low-sellers (excluding classical and instrumental jazz). But that would require Spotify to get real about their growth rates and be honest with their shareholders and partners. Based on the way Spotify treated the country of Uruguay, they are more interested in espoliating a country’s cultural resources than they are in fairly compensating musicians.

Of course, they won’t tell you that side of the story. They won’t even tell you if certain genres or languages will be more impacted than others (like the way labels protected classical and instrumental jazz from getting cut out measured by pop standards). Here’s their explanation:

It’s more impactful [says who?] for these tens of millions of dollars per year to increase payments to those most dependent on streaming revenue — rather than being spread out in tiny payments that typically don’t even reach an artist (as they do not surpass distributors’ minimum payout thresholds). 99.5% of all streams are of tracks that have at least 1,000 annual streams, and each of those tracks will earn more under this policy.

This reference to “minimum payout thresholds” is a very Spotifyesque twisting of a generalization wrapped in cross reference inside of spin. Because of the tiny sums Spotify pays artists due to the insane “big pool” or “market centric” royalty model that made Spotify rich, extremely low royalties make payment a challenge. 

Plus, if they want to make allegations about third party distributors, they should say which distributors they are speaking of and cite directly to specific terms and conditions of those services. We can’t ask these anonymous distributors about their policies if we don’t know who they are. 

What’s more likely is that tech platforms like PayPal stack up transaction fees to make the payment cost more than the royalty paid. Of course, you could probably say that about all streaming if you calculate the cost of accounting on a per stream basis, but that’s a different conversation.

So Spotify wants you to ignore the fact that they impose this “market centric” royalty rate that pays you bupkis in the first place. Since your distributor holds the tiny slivers of money anyway, Spotify just won’t pay you at all. It’s all the same to you, right? You weren’t getting paid anyway, so Spotify will just give your money to these other artists who didn’t ask for it and probably wouldn’t want it if you asked them.

There is a narrative going around that somehow the major labels are behind this. I seriously doubt it–if they ever got caught with their fingers in the cookie jar on this scam, would it be worth the pittance that they will end up getting in pocket after all mouths are fed? The scam is also 180 out from Lucian Grange’s call for artist centric royalty rates, so as a matter of policy it’s inconsistent with at least Universal’s stated goals. So I’d be careful about buying into that theory without some proof.

What About Mechanical Royalties?

What’s interesting about this scam is that switching to Spotify’s obligations on the song side, the accounting rules for mechanical royalties say (37 CFR § 210.6(g)(6) for those reading along at home) seem to contradict the very suckers deal that Spotify is cramming down on the recording side:

Royalties under 17 U.S.C. 115 shall not be considered payable, and no Monthly Statement of Account shall be required, until the compulsory licensee’s [i.e., Spotify’s] cumulative unpaid royalties for the copyright owner equal at least one cent. Moreover, in any case in which the cumulative unpaid royalties under 17 U.S.C. 115 that would otherwise be payable by the compulsory licensee to the copyright owner are less than $5, and the copyright owner has not notified the compulsory licensee in writing that it wishes to receive Monthly Statements of Account reflecting payments of less than $5, the compulsory licensee may choose to defer the payment date for such royalties and provide no Monthly Statements of Account until the earlier of the time for rendering the Monthly Statement of Account for the month in which the compulsory licensee’s cumulative unpaid royalties under section 17 U.S.C. 115 for the copyright owner exceed $5 or the time for rendering the Annual Statement of Account, at which time the compulsory licensee may provide one statement and payment covering the entire period for which royalty payments were deferred.

Much has been made of the fact that Spotify may think it can unilaterally change its obligations to pay sound recording royalties, but they still have to pay mechanicals because of the statute. And when they pay mechanicals, the accounting rules have some pretty low thresholds that require them to pay small amounts. This seems to be the very issue they are criticizing with their proposed change in “royalty policy.”

But remember that the only reason that Spotify has to pay mechanical royalties on the stream discrimination is because they haven’t managed to get that free ride inserted into the mechanical royalty rates alongside all the other safe harbors and goodies they seem to have bought for their payment of historical black box.

So I would expect that Spotify will show up at the Copyright Royalty Board for Phonorecords V and insist on a safe harbor to enshrine stream discrimination into the Rube Goldberg streaming mechanical royalty rates. After all, controlled compositions are only paid on royalty bearing sales, right? And since it seems like they get everything else they want, everyone will roll over and give this to them, too. Then the statutory mechanical will give them protection.

To Each According to Their Needs

Personally, I have an issue with any exception that results in any artist being forced to accept a royalty free deal. Plus, it seems like what should be happening here is that underperforming tracks get dropped, but that doesn’t support the narrative that all the world’s music is on offer. Just not paid for.

Is it a lot of money to any one person? Not really, but it’s obviously enough money to make the exercise worthwhile to Spotify. And notice that they haven’t really told you how much money is involved. It may be that Spotify isn’t holding back any small payments from distributors if all payments are aggregated. But either way it does seem like this new new thing should start with a clean slate–and all accrued royalties should be paid.

This idea that you should be forced to give up any income at all for the greater good of someone else is kind of an odd way of thinking. Or as they say back in the home country, from each according to their ability and to each according to their needs. And you don’t really need the money, do you?

By the way, can you break a $20?

The NO AI Fraud Act

Thanks to U.S. Representatives Salazar and Dean, there’s an effort underway to limit Big Tech’s AI rampage just in time for Davos. (Remember, the AI bubble got started at last year’s World Economic Forum Winter Games in Davos, Switzerland).

Chairman Issa Questions MLC’s Secretive Investment Policy for Hundreds of Millions in Black Box

As we’ve noted a few times, the MLC has a nontransparent–some might say “secretive”–investment policy that has the effect of a government rule. This has caught the attention of Chairman Darrell Issa and Rep. Ben Cline at a recent House oversight hearing. Chairman Issa asked for more information about the investment policy in follow-up “questions for the record” directed to MLC CEO Kris Ahrend. It’s worth getting smart about what the MLC is up to in advance of the upcoming “redesignation” proceeding at the Copyright Office. We all know the decision is cooked and scammed already as part of the Harry Fox Preservation Act (AKA Title I of the MMA), but it will be interesting to see if anyone actually cares and the investment policy is a perfect example. It will also be interesting to see which Copyright Office examiner goes to work for one of the DiMA companies after the redesignation as is their tradition.