Pandemic: The Local Culture Card Solution Lets Public and Private Sectors Cooperate to Save Our Local Musicians and Retailers

The Local Culture Card would be a limited purpose debit card that permits the cardholder to purchase goods or services from a designated group of “local arts vendors” who would be artists, retailers or nonprofit arts organizations operating in the locality of the user.  It would be like a targeted gift card sponsored by state or local government, local corporations, radio or television stations.

Local culture cards would be distributed free of charge to local residents charged up with a minimum payment that must be spent within 30 days of activation.  Once funds are used, the issuer or sponsor could elect to replenish the funds on the same 30 day basis.

Alternatively, the local culture card could be sold like a gift card on the same terms.

The purpose of the Local Culture Card would be to empower consumers with purchasing power to directly inject cash into a local artist community—and quickly.  This would help everyone in the supply chain from vinyl manufacturers to one-stops to local record stores to the artists themselves and their songwriters.

Those local arts vendors would sign up to accept the Local Culture Card as payment for goods or services.  The Local Culture Card could not be used at Amazon, Spotify,  Target, Best Buy, Apple or other big box retailers because the benefit would be too diffused and would not retain local funds in local communities.  The card could instead be used for purchases at a local brick and mortar store’s online operation or to make a Venmo contribution for a live stream performance for a local artist (or purchase directly from the artist’s Bandcamp account).

The Local Culture Card would initially be charged with a minimum amount of credit or could be purchased like a gift card.  It could be branded by locality, state or region and could also be branded as a sponsored card by either state or local government or other private sector sponsor.  It could be included or branded as Record Store Day collateral or similar commercial efforts as it will be effective in both commercial and noncommercial applications.

For example, an Austin Culture Card could be sponsored by the Austin Music Office or the City of Austin Economic Development Department.   City funds would be used to charge up the card with a minimum amount of spending power, say $50.

Artists like Guy Forsyth or Dave Madden could sign up to accept payment through a webpage for their direct online sales or contributions through Venmo or Paypal for live streaming events.  Local retailers like Waterloo Records could sign up to accept the Austin Culture Card for purchases at their online store of recordings by any artist.  Ballet Austin could sign up so that patrons could use the Austin Culture Card to donate to that organization.  Alternatively, Austin Creative Alliance could sign up to accept donations for any of its member organizations.

The same process could be repeated by the Texas Music Office for artists statewide through the TMO’s “Music Friendly City” operation, or by the Small Business Administration for regional or national artists, retailers or organizations.

Alternatively Local Culture Cards could be sponsored by corporations and distributed to their customers or radio stations and distributed to their listeners.  Indie labels could sponsor cards as a tie in with local record stores that carry the label’s recordings.

The only other requirement for using the Local Culture Card would be that the money had to be spent within 30 days of issuance or it would expire.   Ideally a bank issuer would agree to provide the card as either a physical or virtual credit card for a zero transaction fee.  Remember–the Local Culture Card is not scrip, it’s cold cash placed directly into the hands of artists, retailers and arts organizations  by their fans.

While the examples I’ve given are from Austin, there is nothing unique about Austin.  The Local Culture Card would be relevant for any city with a cultural community from New York to New Orleans–that the fans want to retain during and after the pandemic.

 

Pandemic: Force Majeure Contracts and Insurance in the Music Business

After the cancellation of SXSW, we need to think about those “force majeure” clauses that everyone skips over in contractual boilerplate.  “Force majeure” or the less secular “Act of God” clause is a species of the “impossibility of performance” defense to a breach of contract claim that excuses the liability of a nonperforming party.  Earthquakes, floods, severe weather or other natural disasters are what the parties are typically thinking with force majeure, some act that is beyond their control.

These clauses sometimes are risk shifting, meaning that party A and party B may agree that one of them will bear the economic damages of the disaster, or permit rescheduling or other delay until the force majeure event has passed in a reasonable period of time.  Force majeure clauses typically break between suspending performance for a period of time and allowing the parties to terminate the contract, with little or no penalty.  It’s well to think of force majeure as a species of the impossibility defense to a breach of contract that has been available in the law since 1863.  A successful impossibility defense may be thought of as an exoneration of the breach, so excuses nonperformance before the breach actually arises.

This post is much longer than we usually ask you to read, but I think it’s a very important topic and I hope you find it useful.

Examples of Force Majeure Clauses

Distribution Agreement

Contract 1

Force Majeure. If because of: act of God, inevitable accident, fire, lockout, strike or other labor dispute, riot or civil commotion, act of public enemy, enactment, rule, order or act of any government or governmental instrumentality (whether federal, state, local or foreign), failure of technical facilities, failure or delay of transportation facilities, shortage of raw materials, or other cause of a similar or different nature not reasonably within Distributor’s or Company’s control, as applicable (a “Force Majeure Event”), either party hereto is materially hampered in the performance of its obligations under this agreement or its normal business operations are delayed or become impossible or commercially impracticable; then, without limiting such party’s rights, the party affected by such Force Majeure Event shall have the option, by giving the other party notice, to suspend its obligations hereunder for the duration of any such contingency (other than the obligation to account or pay hereunder or permit audits hereunder, except to the extent either party’s ability to do so is impaired by virtue of such Force Majeure Event). Any such suspension shall be limited to a period of the duration of such Force Majeure Event, but in no event longer than six (6) months, after which, unless such suspension shall be lifted, the party not suspending its obligations hereunder may, during the pendency of such suspension, terminate this agreement by notice in writing to the other party. Should Distributor suspend the manufacture or distribution of Products pursuant to this Paragraph, Company shall have the right to manufacture and/or distribute (as applicable) Products itself or through third parties during the pendency of such suspension.

Contract 2

Neither party shall be deemed in default of this Agreement if either party’s obligations are delayed or become impossible or impractical by reason of an act of God, war, fire, earthquake, strike, sickness, accident, civil commotion, epidemic, act of government or governmental instrumentality, failure of technical facilities, failure or delay of transportation facilities, shortage of raw materials, or any other cause of a similar or different nature beyond Distributor’s or Owner’s control (“Force Majeure Event”). Upon the happening of any Force Majeure Event, Distributor may suspend the Term for the duration of the Force Majeure Event by written notice to Owner. Owner shall have the right to terminate this Agreement upon sixty (60) days written notice to Distributor if the Force Majeure Event affecting Distributor is not prevalent throughout the recording industry in the United States and continues for one hundred and eighty (180) days. Distributor shall have the right to terminate this Agreement upon sixty (60) days notice to Owner if the Force Majeure Event affecting Owner is not prevalent throughout the recording industry in the United States and continues for one hundred and eighty (180) days.

Digital Distribution

Contract 1

For the purposes of this Agreement, “Force Majeure” shall mean any event which a Party hereto could not reasonably prevent or predict, such as fire, flood, acts of God or public enemy or terrorist, Internet failures or “hacking”, earthquakes, governmental or court order, national emergency, strikes or labor disputes, the effect of which it could not reasonably prevent or predict and which renders impossible or impractical the performance of contractual obligations either totally or in part.  The Party invoking a Force Majeure shall inform the other Party (either by notice, email, or telephonically) within five (5) business days of its occurrence by accurately describing all the circumstances of the situation involved and its effect upon the performance of its contractual obligations.  The taking place of a Force Majeure shall have the effect of suspending the obligations of the Party which has invoked the provisions of this Section to the extent such obligations are affected by the Force Majeure.  Contractual dates shall be extended for a period equal to the duration of a Force Majeure.  The cessation of a Force Majeure (in the judgment of the Party that invoked it) shall be communicated by the Party that invoked it to the other Party (either by notice, email, or telephonically) within five (5) business days of such cessation.

Contract 2

Force Majeure Event:  any act or event, whether foreseen or unforeseen, that meets all three of the following tests:  (i) the act or event prevents or delays a Party (the “Nonperforming Party”), in whole or in part, from (A) performing its obligations under this Agreement; or (B) satisfying any conditions to the other party’s (“Performing Party”) obligations under this Agreement; (ii) the act or event is beyond the reasonable control of and not the fault of the Nonperforming Party, and (iii) the act could not have been prevented by reasonable precautions and cannot reasonably be circumvented by the Nonperforming Party through the use of alternate sources, work‑around plans or other means.   Without limiting the generality of the foregoing, each of the following acts and events is deemed to meet the requirements of clauses (i) through (iii) and to be a Force Majeure Event: war, flood, lightning, drought, earthquake, fire, volcanic eruption, landslide, hurricane, cyclone, typhoon, tornado, explosion, civil disturbance, act of God or the public enemy, terrorist act, military action, epidemic, famine or plague, shipwreck, or strike, work-to-rule action, go-slow or similar labor difficulty or other similar or dissimilar causes.

Recording Agreement

If because of:  act of God; inevitable accident [an old common-law version of an unavoidable accident, like an accident caused by a deer jumping in front of a car]; fire; lockout, strike or other labor dispute; riot or civil commotion; act of public enemy; enactment, rule, order or act of any government or governmental instrumentality (whether federal, state, local or foreign); failure of technical facilities; failure or delay of transportation facilities; illness or incapacity of any performer or producer; or other cause of a similar or different nature not within Company’s control; Company is materially hampered in the recording, manufacture, distribution or sale of Records, then, without limiting Company’s rights, Company shall have the option by giving you notice to suspend Company’s obligations under this agreement for the duration of any such contingency.  If any suspension imposed under this paragraph by reason of an event affecting no Record manufacturer or distributor except Company continues for more than six (6) months, you may request Company, by notice, to terminate the suspension by notice to you within thirty (30) days after Company’s receipt of your notice.  If Company does not do so, this agreement shall terminate at the end of that thirty‑day (30) period (or at such earlier time which Company may designate by notice to you), and you shall be deemed to have fulfilled all of your obligations under this agreement except those obligations which survive the termination of this agreement (such as warranties, re‑recording restrictions and obligation to pay royalties.

Show Agreements

Contract 1

Each party’s obligations to perform hereunder will be excused in the case of a Force Majeure Event.  A “Force Majeure Event” is defined as acts, omissions, accidents and events which are beyond the reasonable control of the party claiming Force Majeure and which prohibit that party’s performance of its obligations under this Agreement including, without limitation, (i) acts of God, (ii) strikes or labor disruptions in the metropolitan area where the Event is scheduled to be held, (iii) civil riots or disturbances in the metropolitan area where the Event is scheduled to be held, (iv) weather events in the metropolitan area where the Event is scheduled to be held, (v) acts of terrorism in the metropolitan area where the Event is scheduled to be held, (vi) medical conditions, which result in quarantine or similar limitations or restrictions on travel or congregation in the metropolitan area where the Event is scheduled to be held, (vii) damage to the venue where the Event is scheduled to be held rendering it unsafe or unsuitable for giving of live entertainment performances.   In the case of Artist, a Force Majeure Event includes, without limitation, death, serious illness or incapacity of Artist which renders it impossible or not reasonably practical for Artist to attend the performance.  If the Event is cancelled due to a Force Majeure Event, the parties will use commercially reasonable efforts to schedule the Event on an alternate date.  

 Contract 2

In the event Show cannot reasonably be put on because of unpredictable occurrences such as an act of nature, government, or illness/disability of Band, the 50% deposit of Fee is non-refundable, but no other portion of Fee is due, and the parties may negotiate a substitute Show on the same terms as this Agreement save for the time of Show, with no further deposit of Fee due, in which case a new Agreement reflecting this will be signed by the parties. No further damages may be sought for failure to perform because of force majeure.

Hosting Agreement

Except as otherwise provided, if performance hereunder (other than payment) is interfered with by any condition beyond a party’s reasonable control, the affected party, upon giving prompt notice to the other party, shall be excused from such performance to the extent of such condition.  However, if a force majeure detrimentally affects a party’s performance of a material covenant hereunder for fourteen (14) days or more, the other party can terminate this Agreement.  Each party acknowledges that website operations may be affected by numerous factors outside of a party’s control.

Termination for Impossibility Force Majeure

As you can see from the examples given, contracts vary widely on what constitutes a force majeure event outside of a few core events.  They also vary on what action the parties are to take, tending toward short term suspensions with a right of termination.  Only two examples I could find actually mention “epidemic” while another refers to “quarantine” but it is fairly common to refer to what are essentially government orders which may include “state of emergency” type declarations such as that by the City of Austin that essentially caused the cancellation of SXSW.

Almost all refer to the contract law doctrine of “impossibility.”  What is that?  For example, A and B may contract for A to promote concerts at B’s venue on a “four wall” basis, but before the concerts can be performed, B’s venue burns to the ground.  Even if the contract between A and B is silent on force majeure, or refers obliquely to “acts of God,”  the continued existence of the venue is an implied term of the agreement.  In our example, as long as neither A nor B is an arsonist, a court might well find that both are released from their obligations under the agreement because performance is now literally impossible.  B may also be excused from paying A’s losses for promoting the event, or guarantees to performing artists.  The same could be true of heirs not being liable for a personal obligation to perform by a party who dies before the date that performance is due.

Less final intervening events may give rise to a suspension of performance for a period of time with performance subsequently rescheduled.  If the intervening event continues past a certain time period that would be long enough to make the performance stale or undesirable, then some force majeure clauses allow for termination.  It’s common to see this period be designated as six months in the entertainment industries which is usually designed to address labor strikes for companies that are signatories to collective bargaining agreements.

It is important to note that the clean hands–so to speak–of both parties is significant in these cases.  That determination may be proved to a court or jury in evidence by the party not affected by the force majeure event, or made by local police or other governmental authorities investigating the force majeure event.  Delays may result during the pendency of the investigation.

A force majeure event is generally thought to be an intervening event of a great magnitude outside the control of the parties.  The event may make performance impossible, as in the case of the venue that burns, or so difficult it will be deemed to be impossible if the parties bargained for that relief, such as if the venue were flooded due to a hurricane or condemned  due to an earthquake.

A fire that destroys a venue seems like the simple case compared to the coronavirus.  What about an epidemic?  How do you know that there is an “epidemic” in the first place?  One way might be to refer to a declaration of a government body, such as the World Health Organization.  That’s not always helpful.  For example, WHO declared on January 31, 2020 that the coronavirus constitutes a “public health emergency of international concern.”  Is that the same as an “epidemic”?

As we saw with the cancellation of SXSW, economic harm can occur even If there are no cases of coronavirus in your city, state or region, so is what WHO says even relevant in the force majeure analysis for you?  When the Mayor of Austin announced a “local state of disaster” and cancelled the event as a matter of social isolation, it was not because of something that had happened at that time, but rather because of something that might happen and a potential contagion which was anticipated to have dire consequences.  Including political consequences which should not be overlooked.

At the same time as the Mayor cancelled SXSW, the head of the Austin Health Authority acknowledged there was no clear scientific consensus on the effectiveness of cancelling mass gatherings.  While the Mayor’s action clearly affected interstate (and international) commerce and the lack of scientific consensus may seem arbitrary, no Constitutional challenges have yet been mounted (such as the Commerce Clause as well as substantive and procedural due process challenges to geographical quarantines, travel restrictions or “voluntary” social isolation).

In the case of Austin in particular, the city has long branded itself as the “Live Music Capitol of the World”.  The harm of the City’s decision to shut down SXSW could be extensive and long lasting and may result in a political reordering of the city if social isolation becomes the rule.

The question then becomes what is the force majeure event that produces the economic harm?  Is it the presence of the virus somewhere in the world?  The country?  The state?  The county?  The city?  The venue?  Or is the event actually the action of a government authority that may turn out to be an overreaction?  This may be important for analyzing the force majeure clause in a contract, and ultimately for interpreting an insurance policy.

It is well to consider the larger impact on the wider music business if venues start getting shut down, tours cancelled and festivals sidelined.  Record deals are made in anticipation of artists promoting their records, publishing deals may be contingent on record deals being in place, sponsorships may require live appearances at events and so on.  If the touring business is essentially shut down, the ripple effect could be substantial.  Social media alone will not replace touring.

It also must be said that Big Tech has tried for years to get us to believe that digital piracy actually helps artists and songwriters because it drives fans to shows.  Digital music services would have us believe that the artist data they can generate helps with routing tours and that benefit makes up for low royalties.  However stinky that assertion is, if there’s no touring or touring is severely cut back, then piracy and streaming income becomes even more important.

We will review various typical categories of insurance policies and then consider a few actions government could take to offset decisions to foreclose opportunities to work by local musicians and also to essentially shut down local venues.  Since insurance is likely to be unavailing, we will emphasize the importance of working with local musicians and venues to preserve the creative class in cities like Austin.  Because the City of Austin took the action to cancel SXSW, this role falls on government agencies devoted to the commercial music business, such as the Austin Music Office, but also other boards and commissions such as the Austin Music Commission.

I understand that the Mayor believed himself to be acting prudently in cancelling SXSW, and I neither commend nor criticize his decision.  Yet there are consequences from his decision that he has set in motion, and the Mayor needs to deal with those consequences, too.

Insurance

A typical way to address impossibility or force majeure is through insurance of various types.  Unfortunately, in the overwhelming majority of cases, diseases (and therefore epidemics) are excluded unless you have taken specific steps to include an endorsement for that purpose—assuming an endorsement is even available or available at a realistic price.  According to press reports, even SXSW did not have epidemic insurance endorsements to their wide ranging risk coverage.

Let’s consider different types of common insurance policies, but let’s also remember the cynic’s guiding principle of insurance—insurance companies exist to charge you a premium so they can deny coverage.  Almost every case will require policy interpretation and probably litigation.  My bet is there’s going to be lots and lots of litigation due to insurance claims being denied regarding the coronavirus.

Homeowners and Umbrella Personal Liability Coverage:  In a standard “HO3” homeowners policy, transmission of a communicable disease causing bodily injury or property damages is probably excluded (check the “Liability Coverages” paragraph).  Umbrella policies may cover communicable disease other than STDs, so it’s worth checking that coverage.  Travel insurance may cover cancellation due to emergency medical treatment for the traveler but you need to read that policy closely because coverage will turn on definitions as epidemics are probably excluded.

Cancellation Or Non-Appearance Coverage:  Traditional event cancellation or non-appearance insurance is offered by companies like Beazley or K&K/Aon and covers expenses and/or profits from a wide variety of events and perils.  (AEG famously insured its costs for Michael Jackson’s non appearance at 50 shows for the O2 Arena in London.)  These are often big-ticket policies which typically cover power failure, damage to leased or rented venues,  lack of access to the venue, failure of public transport facilities or denial of access (such as a terrorist attack or explosion), earthquakes, labor strikes, inability to erect facilities or staging at the venue, failure of broadcasts, and other previously unforeseen cause that is not the subject of an exclusion.   The policy also can cover both cancellation and non-appearance of key personnel for reasons of death or illness, as well as disease outbreak if not excluded, or just nonappearance. Larger policies are usually written through Lloyds of London or use Lloyds as a “reinsurance” guarantor.  It is almost certain that coronavirus will be excluded for policies written after January 2020, and of course these policies will have force majeure clauses.  Because these insurance contracts are essentially bespoke risk coverage for particular events, they will usually be very clear about what the carrier does and doesn’t cover.

Civil Authority Coverage:  If a shutdown of operations occurs due to a government order, civil authority coverage may be extended to include a disease outbreak.  This coverage was sold during the 2014 Ebola outbreak to cover losses from a government ordered shutdown of your business, a supply chain disruption, or a government ordered shutdown of common carriers such as airlines, ferries, trains and the like.  Those Ebola-related coverages were typically sold as an endorsement to a commercial property program.  If the harm can be shown to be the result of government action, it’s possible that civil authority coverage may offer some relief.

Commercial General Liability:  CGL policies may include “disease” in the definition of “bodily injury.”  Unless otherwise excluded, a venue with CGL might be covered if it did not take adequate precautions that helped spread the coronavirus.  Exclusions could be direct exclusion of communicable diseases, excluding pollution, or other exclusions.

Commercial Property Coverage:  Probably not covered unless a specific endorsement.

Business Interruption Coverage:  If your business closes because your employees are ill due to a disease outbreak, economic losses are probably not covered.  But—if the presence of disease on your business property constitutes “pollution”, you may have coverage for physical property damage due to the disease.

Contingent Business Interruption Coverage:  Usually coverage for you if your customer or vendor fails, but again if that loss is due to a disease outbreak, you are probably not covered absent a specific endorsement.

Environmental Insurance:  These policies may cover losses for bodily injury, clean up and property damage caused by “pollution” which may include viruses and bacteria.  However, it’s common to specify particular bacteria such as Legionella bacteria.

Supply Chain Insurance:  We are beginning to understand the strategic impact of locating so many elements of the U.S. supply chain in China.  Supply chain risk coverage typically would not require losses to physical property, just economic loss due to a supplier’s shut down or other disconnect.

Sovereign Disaster Risk:  Just for reference, the World Bank issues a parametric catastrophe bond that covers pandemic risks as part of its Pandemic Emergency Financing Facility.  The World Bank also sells pandemic risk swaps.  The International Bank for Reconstruction and Development also issues “capital at risk notes” designed to transfer the pandemic risks of low income countries to the global capital markets.  If this has a “Big Short” feel to it, let’s hope not.

Economic Development Action

It is unlikely that insurance is going to help solve the economic loss from cancellation of major tours, concerts and festivals.  Therefore when a government takes action that creates a sudden economic contraction, government should also be prepared to take ameliorative action that helps support local businesses.  In the case of SXSW, there are many downtown businesses that make their year during SXSW, or a good portion of their annual revenues.

If those businesses, especially venues, cannot make payroll or rent, they will close.  As we saw from the Austin Music Census, landlords already are trying to raise rents beyond what venues can reasonably pay, so we have to assume that they will be more than happy to let venues out of their leases—never to return.  If enough venues close—already an endangered species in Austin—then there will be less and less reason to brand Austin as the “Live Music Capitol of the World” and the entire character of the city may change.

Economic Stimulus:  “Affected Venues” and “Affected Musicians” should be criteria based categories of individuals who would be eligible for relief.  State and local governments have some economic levers available to them such as utilities and tax relief.  The Mayor of Austin and mayors of other affected cities should take steps to obtain any federal disaster relief funding available for Affected Venues and Affected Musicians relating to coronavirus (perhaps as part of the federal coronavirus funding).

Tax Relief:  Restaurants large and small, hotels, and others in the hospitality industry as well as supermarkets have no doubt stored large stockpiles of perishable foods in anticipation of SXSW visitors.  There are a lot of hungry people in Central Texas–just ask the Central Texas Food Bank.  Austin has more nonprofits per person than any other city in the country.  These restaurants know where to take their unused food, but give them extraordinary and immediate tax reduction for giving away this food.

Revision of Quarantine Laws:  If decisions are taken by state and local authorities to exercise state police powers to give effect to quarantines or quarantine zones, it is likely that their will be a wave of new legislation to target those powers as most existing quarantine laws have been on the books over 50 years due to the decline in infectious disease.  (A review of quarantine authority was listed as a priority for state governments in the President’s 2002 National Strategy for Homeland Security, but it’s doubtful much was done.)

I will return to this topic in coming weeks and months, but I think a few conclusions are obvious:  First, there may well be a cascading effect of a wide variety of entities reviewing and potentially exercising any force majeure rights they have in existing agreements.  Force majeure clauses will be closely scrutinized in future agreements.  Like force majeure rights in contracts, insurance policies will be closely scrutinized and coverage will likely be litigated.

But the most obvious conclusion is that state and local governments wishing to preserve the cultural and economic base of their cities and regions once this contagion passes must be proactive with alternatives if they are going to order an entire industry to shut down.

 

 

 

Copyright Office Unclaimed Royalties Study Meeting 12/6/19

 

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

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

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

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

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

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

(C) reduce the incidence of unclaimed royalties.

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

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

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

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

@SenThomTillis and Other Members of Congress Question ContentID–Again

ContentID has a lot of potential and in many respects is similar to the SNOCAP audio fingerprinting application from 2005–very similar.  Quite similar.  Although if the SNOCAP team got back together using current technology, that tool could be much more broadly applied including to search.  Which makes me ask why Google isn’t doing the same with their endless resources.

Here’s an excerpt from the Member’s letter about Content ID:

Tillis Letter

Read the letter here

Save the Date: User Centric: Streaming Gentrification or Fairness at SXSW

I’m pleased to be moderating a panel on user-centric streaming royalties with some of the smartest people in the music business at SXSW on Thursday, March 19 at 3:30.  Helienne Lindvall from Ivors Academy, David Lowery of Cracker and Camper Van Beethoven and Portia Sabin from the Music Business Association will join me in a discussion of this important topic that seems to pick up support daily.

Please put us on your calendar if you’re coming to Austin for the conference!  We really want this one to be collaborative with the audience.  Watch this space for further updates.  If you are new to the topic, a good place to start is the “ethical pool” post from last year.

SXSW User Centric
https://schedule.sxsw.com/2020/events/PP103941

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  1. Copyright Office Regulations

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

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

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

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

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

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

Unmatched Lookup

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

Cost Reimbursement

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

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

Future Licensees

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

2.  Role of the Copyright Royalty Judges

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

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

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

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

Unmatched Best Practices and Disclosures

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

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

Sufficiency of Funding and Sufficiency of Allocation

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

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

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

3.  Sunlight is the Best Disinfectant

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

Songwriters are in need of both.

RIP Jay Frank: 2012 Podcast Interview

Very sad to hear of the passing of Jay Frank, one of the great innovators in digital music.  By way of tribute to his over the horizon and around the corner thinking, I thought I would share a podcast interview from 2012 when he had just founded DigSin and he had invited me to participate in the Leadership Music Digital Summit in Nashville circa 2012.

Jay was a guy who both had big ideas and could execute.   Damn few.