In the GAI, no one can hear you scream. Let’s remember that this man has already stolen world culture–twice. It will be a dark kind of fun watching Schmidt get the World Economic Forum, Lawrence Lessig and Greta Thunberg to do a 180 on climate change. Don’t laugh–if anyone can do it, he can. You watch, the Berkman Center and EFF will lead the charge.
After Universal, TikTok Throws Its Toys Out of the Pram In Concerted Refusal to Deal with Merlin
Here’s some news, and make sure you’re sitting down: Still stinging from its encounter with Universal, TikTok wants its counterparties weak, divided and broke. So naturally TikTok is going after Merlin in TikTok’s latest concerted refusal to deal.
Let’s remember the basic premise behind Merlin, the licensing body that independent labels can opt into at their election. Independent labels as a group have a combined market share that is on par with a major label. I recall hearing this from Alison Wenham back when the Association of Independent Music was founded back in 1999. Joining together, independent labels could be strong, united and claiming their fair share right along side the major labels. (Unclear why this seems to be lost on the publishers.)
So after Mr. Tok got a spanking from Universal, TikTok are definitely not going to put up with resistance from independent labels, assuming TikTok are even in business by the time the dust settles. As Kristin Robinson reports in Billboard:
A TikTok spokesperson says that “TikTok would like to offer all of the world’s music to our users. We are committed to working with the independent sector as well as the major labels and publishers. We know that our community of over a billion music fans value the diversity and richness that independent music brings to our platform. We are committed to entering into direct deals with Merlin members in order to keep their music on TikTok.”
Founded in 2008, Merlin represents 15% of the global recorded music market, and it uses that collective market power to negotiate with digital partners on behalf of its members on a similar footing as the bigger major labels.
So there you have it: TikTok doesn’t want any lip from independents that might put them on the same footing as the majors anymore than the MIC Coalition wants lip from GMR. The one thing that TikTok cannot say is that it’s more efficient for the company to negotiate separately with independents. This isn’t about efficiency–it’s about stopping a near Universal-level exodus from happening again. And not just stopping it this time, it’s about stopping it forever.
In other words, crushing the resistance. That option wasn’t available to Mr. Tok when negotiating with Universal but it’s available now.
Of course you know that TikTok intends to hose the independents because the first thing they did before even discussing a potential deal is require the labels sign a nondisclosure agreement (which no doubt is nonnegotiable). Because nothing says transparency like secrecy. And what’s really great is that it’s no problem because nobody in the music business ever talks about their deals.
As Ms. Robinson reports:
Billboard obtained an email TikTok sent out to some Merlin members, stating that the short-form video app “decided not to renew [its] license agreements with Merlin” and that TikTok “may be able to do direct deals” with the labels, provided that they agree to sign a non-disclosure agreement (NDA). “The purpose of the NDA is to enable us to discuss direct licensing agreements with you.” The deadline to sign and return the NDA is Oct. 4. A TikTok spokesperson says, however, that any Merlin label that wishes to stay on TikTok after Oct. 31 can review and sign the TikTok and CapCut agreements anytime before Oct. 25.
Merlin told its members that it is doing “all [it] can to re-engage with TikTok… we have already made it clear to them that we are ready to hold an actual negotiation and address any concerns they may have.”
Actually, the purpose of the NDA is to keep the independent labels quiet under threat of lawsuit from Mr. Tok and his backers like Neil Shen and Sequoia China. TikTok’s feigned support for independent music is about as convincing as an ivory poacher joining PETA.
Careful What You Wish For: Consent Decrees, Compulsory Licenses and the Right to Say No
[This post first appeared on Artist Rights Institute’s Artist Rights Watch blog]
I remember you, you’re the one who made my dreams come true…
Written by Johnny Mercer
Careful What You Wish For
Remember the sales pitch for how wonderful the Music Modernization Act was going to be? An even broader compulsory mechanical license for songwriters combined with yet another safe harbor for music users (with new and improved retroactivity) was going to solve all our problems. A solution for unlicensed songs, black box, unpaid royalties, a stop for “inefficient” litigation. The new musical works database would succeed where all other efforts had failed, not to worry and now back to sleep. Good thing it didn’t make the already complex music licensing regime even more convoluted.
There is, of course, a very simple way to clean up at least some complexities in the music licensing system. Digital services don’t use a track if they don’t clear the publishing. Radio stations certainly can block tracks when they blacklist a particular song. That would, of course, require not just accepting responsibility for licensing but also for doing an effective job of licensing so the platform did not get sued. The whole point of the civil law system is to encourage honest behavior and to empower individuals to unleash hell. Don’t mistake “holding up” a license for standing up and fighting back. Those noisy smallfolk may get in the way but that doesn’t mean they’re wrong.
Who Made Them Special?
It doesn’t seem like it’s working out quite as advertised. We were told before the MMA that you just can’t ask the digital services to actually confirm they have the rights to sell their products. Why do we ask it of other commercial actors in complex rights situations but not digital services? We ask grocers, car dealers, doctors, bankers or even lawyers to know who they are dealing with and make sure they are doing so lawfully. As Justice Thomas wrote in a recent Supreme Court case, [i]n the platforms’ world, they are fully responsible for their websites when it results in constitutional protections, but the moment that responsibility could lead to liability, they can disclaim any obligations and enjoy greater protections from suit than nearly any other industry.”
If a car dealer sold a hot Ford or Ferrari, could the dealer tell the prosecutors that compliance was just too hard? If a pharmacy sold counterfeit insulin could they ask for a safe harbor? If a vaccine manufacturer ….no wait.
But no, we were told that digital services were special and that we needed to give them an even broader compulsory license and an even broader safe harbor than Section 230, DMCA and the natural safe harbor from being the richest companies in commercial history. (And there’s a connection between safe harbors and them being rich while we get a royalty that starts 3 or 5 decimal places to the right.).
After the Spotify bundling debacle, all of a sudden a broader and deeper compulsory license doesn’t look so hot. Plus it now appears that Spotify is to be singled out in the coming Phonorecords V proceeding which will be starting in a matter of months. That may not be a dog whistle to the lawyers, but it sure sounds like the meter going down. This may be a test of the antitrust exemption for what sure seems to me to be a concerted refusal to deal, but then I’m just a country lawyer and I’m not as smart as the city fellers. (All the more reason for songwriters and labels to make another separate peace on physical like Phonorecords IV and do it quickly.)
Abandoning The Right to Say No
In other words, it looks like it’s going to be making something extremely complicated with side issues galore when it really comes down to a simple issue: The right to say no. Unfortunately, the compulsory license and the ASCAP and BMI antitrust consent decrees exist for a single reason which is to take away that right to say no. But that was what they wanted and now they’ve got it.
How does the other side perceive their cherished ability to hide behind the government’s boot on our throats? A “friend of the court” brief in the current appeal of the BMI v. NACPA rate court case under the BMI antitrust consent decree gives us some insight. These briefs (also called “amicus briefs”) are sometimes filed in court cases, especially appellate cases, by entities who are not parties to the litigation but who may be affected by the outcome and who are trying to influence the court’s decision. The briefs are often filed by trade associations, giving the members of those associations plausible deniability as to their own intentions.
The “friends” or “amici” often want to point out to the members of the court potential unintended consequences or broader effects of a pending judicial decision resolving the particular controversy. It is common for groups of amici to band together, thus giving the court the benefit of the thinking of companies with (or representing) an interest in how the court rules. These briefs also give some insight into what the other side is thinking.
The joint amicus brief that caught my eye in the BMI v. NACPA BMI rate court case was a brief filed by a number of amici including the National Association of Broadcasters (NAB) and the Digital Media Association (DiMA). That alliance caught my eye. Three guesses why.
The core logical flaw of the argument by these amici is that they omit the solution of saying no. They want the court to believe that using music is all too complicated. For example:
The [BMI rate court’s] decision here is wrong. It set a rate for BMI using as “benchmarks” rates obtained by two very different performing rights organizations, SESAC and GMR, in very different economic circumstances than pertain to the marketplace governing BMI and ASCAP licensing.
What’s the principal difference between rates paid to BMI (and ASCAP) and rates paid to SESAC and GMR? The biggest difference identified by the trade association “friends” representing companies that together have market capitalizations in the $3 trillion range is that songwriters represented by SESAC and GMR are free to negotiate. And we can’t have that, now, can we? Here’s the explanation from the “friends”:
BMI and ASCAP, which together control over 90% of all public performance rights in musical works…are subject to consent decrees intended to protect entities like amici from the anticompetitive abuses that come with the aggregation of vast numbers of copyrights in the hands of a single licensing entity….As amici have experienced firsthand [oh, my, first hand? Poor babies!], SESAC and GMR are not subject to the same constraints on anticompetitive conduct as BMI and ASCAP, and amici enjoy none of the consent decrees’ protections when they negotiate—as they must—with SESAC and GMR.
Although SESAC and GMR have smaller repertories than BMI and ASCAP do (partially because they are invitation-only organizations, unlike BMI and ASCAP), each nonetheless controls the rights to multiple thousands of musical compositions, including works of writers as iconic as those who populate the ranks of BMI and ASCAP (such as Adele and Bob Dylan who are licensed by SESAC, and Bruce Springsteen and John Lennon who are licensed by GMR).
Friends Don’t Let Friends Change One-Way Streets
So what the friends argue is that the BMI rate court should not have taken into account the rates negotiated by SESAC and GMR at arms length when setting the consent decree rate for BMI. In other words, when setting what is effectively a government-mandated rate, the BMI rate court should not have considered a willing buyer/willing seller negotiated rate because that was mixing apples and rotten apples. Which those poor babies know “first hand”–they, too, have been bullied by those “iconic” writers who fancy themselves worth more to music users than the other 90%. Oh, the arrogance!
And here is the fallacious conclusion of the false choice:
Industry reality thus makes it a necessity for amici to obtain blanket licenses from SESAC and GMR as well as BMI and ASCAP. This is particularly the case because music rights are often fragmented, with multiple PROs controlling interests in a single song. Adding to the problem, composition ownership information is opaque and inaccurate. Amici thus face, on the one hand, the threat of crippling copyright infringement liability if they do not obtain SESAC and GMR licenses and, on the other, supra-competitive prices that SESAC and GMR invariably charge when they do. As a result, they find themselves wedged between a rock and a hard place.
This is the essence of the false choice that keeps coming up in these relationships. The underlying fallacy is that in order to use the music, the richest companies in commercial history must negotiate with SESAC and GMR (especially GMR if you ask me) and those pesky, albeit iconic, songwriters who allow these PROs to represent them. SESAC and GMR are not compelled by the government to bend the knee. If songwriters are allowed to keep going down that road outside the government’s boot, God knows where that might end up. They might get it in their heads that they’re actually worth something. We can’t have that, now can we?
And worse yet, if the government’s rate courts start using these freely negotiated terms to set compulsory rates, the one way street might change direction. And we can’t have that, either. But isn’t the essence of a compulsory license that the government is supposed to approximate what a willing buyer would pay a willing seller for the licensed rights? So aren’t the SESAC and GMR rates for the same use exactly the kind of benchmark the government should use when setting rates for everyone else?
Saying the Quiet Part Out Loud
This drives them wild, of course. They actually say the quiet part out loud:
[T]he impact of [SESAC and GMR’s] supra-competitive [free market] licensing practices on licensees has been cabined before the decision below, in large part because (a) the actual prices, while inflated, are not so high as to be ruinous to licensees given the comparatively smaller repertories involved; and (b) no rate court until now had relied on SESAC or GMR rates in setting rates for the much larger BMI and ASCAP repertories. In relying on SESAC and GMR’s rates, the district court turned a long-standing consent decree designed to protect music users on its head. The BMI consent decree was designed to stop BMI, a music-rights aggregator with monopoly power, from abusing that power. But [BMI Rate Court] Judge Stanton’s decision effectively endorsed those abuses by setting a rate that BMI could never get in a competitive marketplace, even though that is the governing standard for BMI (and ASCAP) rate-setting cases.
And there’s the false choice again. If you can’t afford Le Bernadin, no one is forcing you to dine there. All these music users can just say no. They don’t want to. What they want is to get the music on the cheap. And, frankly, take a lazy approach to licensing. Yet the amici acknowledge that the court is bound to use a rate from a competitive marketplace as the “governing standard” in setting consent decree rates.
Here’s the rub. Until SESAC and especially GMR came along there effectively had never been a competitive performance royalty rate so the “governing standard” was essentially iterative and therefore meaningless. All these companies represented by amici got the government discount in rate court because of their lobbying power. As Senator John Kennedy told Mark Zuckerberg, tech companies are like countries and they get whatever they want in Washington–the primary reason artists have never been paid for broadcast radio performances of their recordings. And a recession is when Google lays off 25 Members of Congress.
While these music users are supposed to negotiate before going to rate court, those negotiations are just inconveniences so they could get to rate court and start running up legal fees. And shocker–when they have to negotiate with GMR and cannot go to rate court, they end up paying more. Just FYI, there’s also gambling in Rick’s American Bar.
The False Choices
So false choice number 1: The users don’t have to use music they can’t afford. False choice number 2: When songwriters cannot step away from the table and refuse to license, it’s the government that imposes a lower rate particularly when staying in rate court costs a fortune.
The government doesn’t protect the user from anticompetitive behavior, it protects the user from a competitive marketplace. That insulated rate is brought about through lobbying the executive branch and ultimately the Department of Justice. My bet is that this is the only reason–the only reason–that the ASCAP and BMI consent decrees are the longest running consent decrees in US history and probably world history.
Remember when the DOJ was reviewing all antitrust consent decrees in 2018 and terminated over 1000? But not for those dangerous anti-competitive songwriters. Yes, sir, as soon as that writer room door closes they get right down to colluding because that is the essence of songwriting.
For some reason–I wonder why–the DOJ decided that songwriters needed to be right up there with Otis Elevator and Microsoft and continued the bloodsucking consent decree cottage industry that has sent generations of children through prep school, college and law school. So here we are again arguing over the false choices. Hopefully, we may be entering a new era of enlightened thinking where publishers are willing to stand up and be counted to get the government’s boot off their throats.
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.
Songwriter Catalog Sales and Unrealized Capital Gains
If you’e been reading along at home, you may be aware that there is an extensive tax proposal from the Biden Administration on the table. The President previewed his tax proposal in the 2024 State of the Nation and documented it in the form of .the President’s 2025 budget and concomitant tax plan. It’s hard to know with certainty as of this writing, but it appears that Vice President Harris supports the President’s tax plan at least according to sources like Morningstar and may have adopted it in her campaign. I guess we’ll find out eventually.
Among other things, part of the proposal is to institute a new wealth tax by means of a new tax on something called “unrealized capital gains.” This means you pay tax on a paper gain from an asset like your home, artwork, or shares of stock regardless of whether you sold the taxed asset and had (or “realized”) gains from the sale. Those taxed assets may include the sale of a song or sound recording catalog.
Of course, if unrealized capital gains are taxed by the federal government, we have to imagine that the 41 states which tax capital gains at the state level will join in, starting with California and New York. Federal and state capital gains tax will be very complex. Commentators believe this idea is likely to have a host of unintended consequences.
Liquidity and Valuation Problems
The two biggest problems with this concept of taxing unrealized gains are liquidity of the taxpayer to actually pay the tax and how to determine the value to be attributed to the taxable asset in order to calculate that tax in the first place. If the proposal becomes law, we can see that there will be cottage industries in tax loans and valuation experts.
If you’re not familiar with the vernacular, “realized gains” means you made money on the sale of an asset and thus have the money to pay the tax at the time the taxed asset is sold (or gains are “realized”). You may also be able to take that cost into account when determine a selling price. Alternatively, “unrealized gains” means you have to pay the tax without selling the asset. That tax payment must come from somewhere; likely other liquid cash (or you may in the end have to sell the taxed asset in order to pay the tax on unrealized gains that were levied before you sold–and would have to pay tax on the sale and so on and so on). This is the liquidity problem with the idea of taxing unrealized gains.
So if you have a song catalog and the new tax covers intangible assets like songs (or patents for that matter), you have to pay taxes as you go if you are a taxpayer subject to the unrealized capital gains tax. It’s unclear whether it is Constitutional to tax an unrealized gain. (For “realized” interpretation see Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955) which holds that income is realized whenever there are “instances of [1] undeniable accessions to wealth, [2] clearly realized, and [3] over which the taxpayers have complete dominion.”).
Remember, the sale of song catalogs is generally given capital gains treatment under Section 1221(b)(3) of the Internal Revenue Code. This provision permits songwriters to treat revenue from the sale of their self-created musical works as capital gains rather than ordinary income. This means that the profits from catalog sales are taxed at the lower capital gains tax rate, instead of the much higher ordinary income tax rates. If the unrealized gains proposal is applied to song catalogs, it goes even further than taxing at ordinary income rates on the realized gains from a sale–there doesn’t even need to be a sale.
Origins of the Billionaires Minimum Income Tax
I flagged a version of this new tax that was floated by Artist Enemy Number 1 Senator Ron Wyden back in 2019, but his “Billionaire’s Income Tax” bill has now been refined into an explicit budget proposal by the Biden Administration. Like most unpopular tax proposals (one study showed 3-1 opposition), Senator Wyden’s proposal was originally to apply to “millionaires and billionaires”, or in the immortal words of Senator Russell B. Long, don’t tax you, don’t tax me, tax that fellow behind the tree. Of course, if you count home values into net worth as one does, there’s way more than a handful of taxpayers with a net worth over $1 million. When Senator Wyden says “millionaires and billionaires” he doesn’t really mean just any millionaire because that would mean a lot of homeowners–eight million homes in the US are valued over $1 million. He probably means “rich people” especially rich people who inherited wealth. Like Ron Wyden.
But there’s rich and then there’s rich. Washington being what it is, when they’ve spent and leveraged new taxes from “millionaires and billionaires” what starts out being a tax that only effects a relatively small percentage of the universe of taxpayers, somehow has a way of seeking lower levels–you know, trickle down. That’s already happened–what started out with Senator Wyden going after “millionaires and billionaires” or what in March 2024 the Treasury Department called a “Billionaires Tax” has now settled into people with $100 million net worth (assets minus liabilities). That’s about 14,000 taxpayers in the US. And stay with me here–even though the threshold is $100 million the tax is called the Billionaires Minimum Income Tax, or “BMIT.” That acronym makes you focus on the billionaires (boo!) and ignore that billionaires are only about half the people who will be subject to the tax. And when Washington comes up with an acronym that hides an important detail like who is taxed, you know they’re serious. The plan may be shovel ready, but it’s definitely trickle down–and it’s only August.
$100 million is not a billion. $100 million could include Bruce Springsteen, Bob Dylan, Stevie Nicks, Neil Young and probably Paul Simon, estate of David Bowie and Bon Jovi, maybe all or substantially all major songwriters who sold their catalogs in the last few years. If they weren’t in the category before they sold their catalogs, they probably were after the sale which was likely taxed at the lower capital gains rate and not at the higher ordinary income rates. If you were, say, Taylor Swift or Beyoncé who have yet to sell their catalogs, your net worth is over $100 million and unrealized gains in that song catalog might be a juicy target for the IRS and their unrealized capital gains tax.
The Valuation Problem
So who decides how much unrealized gain is taxable? That question lays bare the valuation problem with this proposal. Remember, unrealized capital gain refers to the increase in value of an investment or an asset that you hold but have not yet sold. Remember, these gains are “unrealized” because they exist only on paper. Gains (or losses) only become “realized” once the asset is sold. The amount of unrealized gain or loss is the difference between the initial purchase price and the current market price. And therein lies the rub.
If the asset has not been sold, then in order to be taxed in must be valued. Coming up with a value is pretty easy if the asset is a publicly traded stock. But–if that particular asset class does not have a liquid market, then someone has to “mark to market” being an estimate of the fair market value of the asset on the day the asset is valued, or “marked.” In other words, “they” guess. The taxpayer hopes they guess low, and the IRS hopes they guess high. The problem is, the IRS’s guess is the only one that counts.
If that seems unconstitutional, have a peek at a recent U.S. Supreme Court case, Moore v. United States. Writing for a 7-2 majority, Justice Kavanaugh said that a similar (but not identical in my view) set of facts allowed Congress to tax U.S. residents on “realized but undistributed” income from a closely held foreign corporation. Justice Kavanaugh for the majority held that tax “does not exceed Congress’s constitutional authority” that “applies when Congress treats the entity [receiving the money] as a pass-through.” Importantly, Justices Thomas and Gorsuch dissented asserting that because the taxpayers “never actually received any of their investment gains, those unrealized gains could not be taxed as ‘income.” It also should be noted that the majority took great pains to make clear that the Moore case presented a “precise and narrow question” which should be construed narrowly. Dissents have a way of becoming the opinion of the Court, so I wouldn’t make too much of the Moore case in the context of taxing unrealized capital gains for your house although many commenters think it’s a step toward finding that the “billionaire’s tax” is Constitutional. I think Moore can be distinguished.
The Invitation to Shenanigans
Compare mark to market to historical cost accounting, which maintains an asset’s value at the original purchase cost. This can get hinky in volatile markets. If you remember the end of The Big Short, Dr. Michael Burry was trying to get the smart people on Wall Street to mark his credit default swaps which would have required them to take an even bigger bath than the smug bankers actually took.
This was an invitation to shenanigans. Goldman came up with excuses for why they hadn’t marked the swaps (“Goldman had a systems failure…” an excuse Dr. Burry receives skeptically. That’s mark to market. Somebody like Goldman Sachs or the IRS who is conflicted invents a value today that benefits them without regard to what you paid or what would be paid. You know, like when the willing buyer and the willing seller are the same person.
Crucially, the liquidity and valuation problems with taxing unrealized gains are a practical ones–you’ll be taxing people on paper profits when they have not realized the cash to pay the tax. That means the tax payment has to come from somewhere else unless the holder is forced to sell the taxable asset in order to pay the tax. And is able to sell.
In the case of illiquid assets, like say song catalogs, that may not be so easy to do. One of the reasons that the U.S. has never taxed unrealized capital gains is that the practical problems can become political problems.
Will Song Catalogs Be Subject to the New Wealth Tax?
But, yes, I did say song catalogs. Hold that thought for a moment and let’s look at what assets will be included in this new tax category. And think about this thought experiment: Songwriter A manages to get to the point that they can sell their catalog for a price that puts their net worth over $100 million but does not sell futures. Those as yet unwritten songs will accumulate in a new catalog. The songwriter then continues to write valuable songs and creates a new publishing catalog and holds off selling that catalog for a while–under the proposal that new catalog would potentially be subject to the unrealized capital gains wealth tax. Here are the asset classes we know about:
1. Publicly Traded Securities
Publicly traded securities, such as stocks, bonds and mutual fund shares, are a big target. If there is a liquid market for these assets, valuation is relatively easy based on their market price. Remember, if you hold shares in a publicly traded company and the value of those shares increases before you sell the shares, that unrealized gain would be subject to the proposed tax, even if you don’t sell your shares. I haven’t seen a discussion about unrealized losses. Gee, I wonder why.
2. Private Equity and Venture Capital Investments
If you hold shares in a private company or a startup, i.e., not publicly traded, unrealized gain in those shares is also taxed. This will surely raise valuation issues.
3. Real Estate Holdings
Residential or commercial real estate gains are also taxed. For example, if a paying taxpayer owns a home that has appreciated in value, the unrealized gain could be subject to the proposed tax.
4. Collectibles and Art
Collectibles and art are also included in the proposed tax base including fine art, rare coins, vintage cars, and other valuable collectibles These assets can appreciate over time, and the proposed laws aim to capture the unrealized gains on such items. Again, there’s a valuation issue.
5. Cryptocurrencies
Cryptocurrencies like Bitcoin or Ethereum would need to report and pay taxes on the unrealized gains of these digital assets. Given the volatility of many cryptocurrencies, valuation is going to be a challenge, particularly if Bitcoin was valued at 10x in year 1 but fell to -10x in year 2.
6. Other Securities
Securities like derivatives and options, are also included. These instruments can have complex valuations, but the proposed laws require taxpayers to report unrealized gains on these assets.
Will Valuation Experts be Worth More than Songwriters?
There are many consequences of establishing a new tax regime like taxing unrealized gains. It may seem far off if the only people affected (for now) are $100 millionaires. But having crossed that red line, both more asset classes and more taxpayers could be drawn in. If the government dropped the limit to taxpayers with a net worth of $50 million, they now have 97,000 taxpayers to hit with an unrealized gains tax bill. At a $25 million net worth, there are over 250,000. Is $25 million still rich? Not in Silicon Valley, maybe, but anywhere else…. So how long do you think it will take for “them” to get down to that level or even lower with their billionaires tax on millionaires? Get thee behind me, Satan.
Obviously, the business to be in if this regime becomes law is the valuation business.
Study: The CCP’s Digital Charm Offensive: How TikTok’s Search Algorithm and Pro-China Influence Networks Indoctrinate GenZ Users in the United States
I’ve been concerned for a a good four years and with advancing velocity that TikTok’s is leveraging unsuspecting artists and fans to advance a murky agenda. And frankly duping most of the executives in our business into believing that TikTok was just another addictive social media site. There are many clinical issues with TikTok and the short video format, but behind all that is the algorithm.
Allowing TikTok to continue to be operated by its current parent company could allow the Chinese government to covertly influence US elections, the Justice Department said in a court filing late Friday.
In a federal appeals court filing, prosecutors raised concerns that TikTok’s algorithm could be used in a “secret manipulation” campaign to “influence the views of Americans for its own purposes.”
“Among other things, it would allow a foreign government to illicitly interfere with our political system and political discourse, including our elections,” prosecutors wrote. The filing added, “if, for example, the Chinese government were to determine that the outcome of a particular American election as sufficiently important to Chinese interests.”
“Allowing the Chinese government to remain poised to use TikTok to maximum effectiveness at a moment of extreme importance presents an unacceptable threat to national security,” prosecutors wrote.
It should come as no surprise that the CCP government treats the TikTok algorithm as something of a state secret and has put export restrictions on the technology in an attempt to block any sale that includes the algorithm (which of course is TikTok’s primary asset).
A recent study from the Network Contagion Research Institute at Rutgers University may shed light on why this is all such a big deal to both state and federal governments in the US. That study finds:
Amplification of Pro-China and Irrelevant Content: TikTok amplifies frontier influencers (travel and lifestyle content accounts) and irrelevant or clickbait material, to crowd out discussion of CCP-driven ethnic genocide and human rights abuses on its platform.
Suppression of Anti-China Content: TikTok’s moderation algorithms significantly augment this suppression. The views-to-likes ratio for anti-China content on TikTok was 87% lower than pro-China content even though the content was liked nearly twice as much.Cross-Platform Influence Operations: The CCP also uses frontier influencers and stateaffiliated
media to disseminate pro-China narratives to crowd out discussion of human rights abuses on Instagram and YouTube with tourism and culture content.
Psychological Indoctrination: A psychological survey of Americans (n=1214) shows that, among the platforms studied, TikTok screentime positively and uniquely predicted favorability towards China’s human rights record. Notably, heavy users of TikTok (i.e., those with >3 hours of daily screentime) demonstrated a roughly 50% increase in pro-China attitudes compared to non-users. This suggests that TikTok’s content may contribute to psychological manipulation of users, aligning with the CCP’s strategic
objective of shaping favorable perceptions among young audiences.
Strategic Assessment: NCRI assesses that the CCP is deploying algorithmic manipulation in combination with prolific information operations to impact user beliefs and behaviors on a massive scale and that these efforts prove highly successful on TikTok in particular. These findings underscore the urgent need for transparent regulation of social media algorithms, or even the creation of a public trust funded by the platforms themselves to safeguard democratic values and free will.So there’s that.
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?
Let’s not do this again, shall we? Did Daniel Ek become a billionaire because of Spotify’s revenue or profit or because of his stock?
Digital Music News reports “Spotify CEO Daniel Ek Is Richer Than Any Musician—Yes, Even Taylor Swift.” Did that just sneak up or is it really Groundhog Day? Maybe it’s groundhog day in Sweden.
Let’s try this again. Remember that artists and labels get paid a revenue share from Spotify. (So do songwriters, but that’s a whole other conversation.) Before you go any farther, getting a share of revenue is for chumps. But what does that mean, this “revenue”. Consider the definition of “gross revenue” that is common in the negotiated version of these deals:
“Gross Revenues” means, with respect to audio and video streams, all gross revenues directly related to the Services, including but not restricted to (i) all revenues attributable to text and/or graphic display, rich media and “in-stream” advertising revenues (i.e., audio, visual or audiovisual advertisements exhibited before, during or after a stream containing any Label Materials) generated from software client interfaces, widgets or properties through which the Services are made available; (ii) all revenues attributable to CPC-, CPM- and CPA-based advertising, e-commerce and “referral fees”/bounties (including non-refundable advances and guarantees, however characterized) generated via the Services, whether structured as a one-time payment or as a recurring revenue share, but specifically excluding e-commerce, “referral fees”/bounties and like revenue generated from sales of permanent audio and video downloads; (iii) all sponsorships sold by Company or its agents; (iv) solely with respect to the Subscription Services, all subscription income; and (v) any share of traffic or tariff charges for delivery of the Services that Company may be able to secure from telecommunications partners, and (vi) all revenues derived from the sale of data related to End Users and their use of the Services [then less a bunch of deductions]”
Now you can just tell that some smart lawyers somewhere sat down to try to think of all the ways that Spotify could earn revenue so they could include those sources in their deal. What did they miss out?
The stock.
In fairness, they didn’t miss out the stock entirely, they just missed it out from the deal that all the artists got paid on. The stock was dealt with in another contract not connected to the main sound recording license and never the twain shall meet.
But what this approach misses entirely is that once you have sold the stock in a stock grant, you’re done being a shareholder. Unless you get another stock grant, which we will assume hasn’t happened.
Leave aside the issue of trading stock for lower royalties, because it’s actually worse that that–it’s trading a one-time stock bump for a lower long term royalty rates set at a price point you have to keep digging out of.
I’m just a country lawyer from Texas and I’m not as smart as the city fellers, but it seems to me that if you knew going in that the big money was in the stock, why wouldn’t you get some measurement of the increase in the net worth of Daniel Ek or some comparable metric as a money factor in the revenue calculation? Getting a one time stock grant isn’t really the same thing. And I say using Ek’s net worth as a bogey only slightly facetiously. That is a little specific, but let’s be honest. It’s Ek’s net worth that really pisses people off, right? And if our Spotify earnings increased in some relationship to his increase in wealth, we’d all probably feel at least less screwed if not actually better about the whole thing.
But even if you didn’t use that metric but knew and acknowledged that the real value was in the stock and the increase in market capitalization due to artists and songwriters, why would you ever allow yourself to get snowed by Spotify’s poor mouthing about they can’t make a profit when it should have been obvious for the last 10-plus years that Spotify didn’t care about making a profit?
The saving grace is, of course, that it’s a damn good thing we’re never going to let another MTV build a business on our backs.
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:
- 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.
- 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.
- 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.
- 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.
- 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.
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