[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.
- 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.
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.
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.
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.