Tag: MLC redesignation

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case) is the statutory body created by Title I of the Music Modernization Act) and it lasts as long as the MMA is not repealed or modified.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.

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?