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

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

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

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

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

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

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

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

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

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

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

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

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

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

  1. Copyright Office Regulations

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

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

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

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

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

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

Unmatched Lookup

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

Cost Reimbursement

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

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

Future Licensees

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

2.  Role of the Copyright Royalty Judges

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

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

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

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

Unmatched Best Practices and Disclosures

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

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

Sufficiency of Funding and Sufficiency of Allocation

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

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

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

3.  Sunlight is the Best Disinfectant

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

Songwriters are in need of both.

New Copyright Office Regulations Regarding Pre-72 Recordings

Title II of the Music Modernization Act (“MMA”), (also known by its own bill title the Classics Protection and Access Act or the “CLASSICS Act) is self-executing legislation that gives certain federal copyright protections to recordings released prior to February 15, 1972.  One of the new protections is the right to recover the customary statutory damages for infringements of those pre-72 recordings available to copyright owners in the normal course.

However, in order to be eligible to recover statutory damages, copyright owners of pre-72 recordings must file Excel spreadsheets of schedules listing their pre-1972 recordings and contact information with the U.S. Copyright Office to be indexed by the Copyright Office into the Office’s public records.  This formality is in lieu of filing the customary copyright registrations.  Statutory damages are only available for infringements occurring more than 90 days after indexing.   The index is available at https://www.copyright.gov/music-modernization/pre1972-soundrecordings/search-soundrecordings.html.

In addition to imposing this formality on copyright owners, the MMA creates a new safe harbor for infringers.  That safe harbor was just coincidentally added at the insistence of Senator Ron Wyden under threat of a Senate hold on the entire bill.  If the infringer is making a noncommercial use of a sound recording that is not being commercially exploited, statutory damages are not available provided that the infringer has made a ‘‘good faith, reasonable search for’’ the infringed work in the indexed schedules before determining that the recording is not being commercially exploited.

The MMA creates an additional and separate safe harbor for entities that were transmitting pre-72 recordings at the time the MMA was enacted.  Rights owners must provide specific notice to such entities before pursuing remedies against them.  In order to provide such notice, that transmitting entity must register their contact information with the Copyright Office within 180 days from enactment (which expired April 9, 2019) (available at https://www.copyright.gov/music-modernization/pre1972-soundrecordings/notices-contact-information.html).

For those reading along at home, the Final Rule is found in 37 C.F.R. §201.35 (available at https://www.copyright.gov/title37/201/37cfr201-35.html) and was published at 84 Fed. Reg. 10679 (March 22, 2019) https://www.govinfo.gov/content/pkg/FR-2019-03-22/pdf/2019-05549.pdf.

Big Tech’s Latest Infringement Loophole: Mass Filings of NOIs to Avoid Paying Statutory Royalties (Part 3)

Recap of Part 1 and Part 2

As we saw in parts 1 and 2 of this post, New Boss companies like Google are playing on a loophole in the Copyright Act’s compulsory license for songs to shirk responsibility for song licensing from the songwriters or other copyright owners, get out of paying royalties and stop songwriters from auditing.

Not only have Google targeted long tail titles, but also new releases and songs by ex-US songwriters who are protected by international treaties.  This is exactly the kind of rent seeking behavior by crony capitalists that gives Big Tech a bad name in the music community.

Google are doing this on a grand scale and at great expense, reportedly using “millions” of “address unknown” NOI filings with the Copyright Office that are supposed to be reserved for bona fide situations where the copyright owner cannot be found after a reasonably diligent search.  Amazon is doing the same.

Through a quirk in the law (which needs to be fixed pronto) Google and Amazon are paying astonishing sums in filing fees to send the “address unknown” NOIs to the Copyright Office for songs that have not been registered for U.S. copyright or otherwise recorded with the Copyright Office.  “Address unknown” NOIs are intended to be used when you really can’t find the address of the copyright owner after a diligent search of relevant records, although the Copyright Act limits the search to the public records of the Copyright Office.  That limitation on records to be searched is a legacy echo from the 1909 revision of the Copyright Act which required registration and renewal for copyright to attach in the U.S.

So far, the overwhelming majority of “address unknown” NOIs are filed by Google.  Spot checking the Amazon filings shows that Amazon filed a handful of titles.

Google apparently accomplishes this by manipulating a data dump from the Library of Congress that was never designed for filing mass NOIs and comparing the metadata in the data dump song title to their own list of sound recording titles that they want to exploit on their services.

Moral Hazard Revisited, DMCA Style

If you have a recording you want to use, you need to clear the song.  You take that song title from the recording and look it up in the Library of Congress data dump.  If it’s not there, you file the “address unknown” NOI.  Wash, rinse, repeat 1,000,000 times or more. See how that works?

As if by magic, you don’t have to pay mechanical royalties until the songwriter figures out what you have done by checking the NOI submissions page at the Copyright Office (assuming anyone knows it’s there or knows their song might be listed) and then…does what?

co-nois-1
Note that “1 NOI” means “1 NOI with tens of thousands of songs attached in an Excel file”

This approach is fraught with moral hazard for largely the same reasons that plague the DMCA safe harbor–the party who benefits from avoiding both royalties and copyright infringement liability by sending the “address unknown” NOI is also the party who decides whether they qualify for the “address unknown” NOI.  The Copyright Office clearly lacks the resources to cross check.  Sounds kind of like DMCA notices, right?

The excuse the services  give for this approach is that they can’t find the copyright owner for “long tail” and new releases.

The long tail part you can understand, but of course you have to ask yourself if a title is so obscure that you can’t find the song copyright owner, then why use it at all?  Holding a track off of a service is far more likely to get the songwriter to come forward than sneaking around through the back door.

The New Release Scam Illustrated

It’s with new releases that Google runs the true arbitrage play.  This is the part that makes no sense, particularly for songs written or owned by people with whom Google does repeat business.  By relying on the “address unknown” NOI filings for new releases, even for songs that may be subject to a direct license, Google is using a loophole to appropriate value to themselves that should rightly go to the songwriters.

Let’s take another Sting example.

Sting released the song “50,000”, apparently as a single from his new 57th & 9th LP.  “50,000” is an introspective Sting-style tribute to David Bowie and Prince.  The album release date was September 23, 2016 and the single debuted around September 17.  Google must have gotten the track around the same time as it is listed in Google’s September 16, 2016 mass NOI filing on line 626.

50000-noi

“50,000” is a particularly good example of how bogus Google’s approach is to “address unknown” NOIs.  Google’s basis for filing the NOI on “50,000” apparently is that “50,000” is not included in either a copyright registration or other recording in the public records of the Copyright Office at the moment that Google looked for it.  What this evidently means is that “50,000” wasn’t in the Library of Congress data dump sometime prior to September 16 when Google filed its mass NOI.

It is important to remember that there is no requirement for anyone to register their works or otherwise record their works in order to enjoy the rights of a copyright owner–such as mechanical royalties.  This is true under international copyright law, not just in the U.S., so this quirk in U.S. copyright law is probably illegal and possibly unenforceable  (which is why the “address unknown” NOI filing needs to be amended or eliminated–more about that below).

So simply put–how can you take away rights from a copyright owner based on a registration requirement that the copyright owner is not required to comply with because it is a formality that is actually prohibited by law?  Sound Kafka-esque to you?  It does to me.

In Sting’s case, Google knows who Sting is.  They have other songs by Sting for which they probably sent an NOI.  They may even have a direct license with Sting’s publisher that may actually supersede or be in lieu of a statutory license.  In other words–they very well may have actual knowledge of Sting’s publisher.  Wouldn’t that be a good place to start?

Yet because a new release has not yet shown up in the Copyright Office records, Google sends an NOI and will not be required to pay royalties until–if ever–the song is included in the Library of Congress data dump.  Even though Sting is not required to register the song, Sting’s publisher may decide to register the copyright in order to take advantage of statutory damages and attorneys fees for infringement actions.

Getting a conformed copy of a copyright registration can take months–so for a single or an album, any mechanical royalties from Google under a statutory license during the new release window will never be paid.  And if any direct license does not expressly prohibit including titles in mass NOIs, there’s a good chance no new release will get mechanical royalties from Google.

What Is To Be Done?

So now we know what the problem is, how to stop it?  Not so easy to do.

1. Anticompetitive:  It should not be lost on anyone that the government has created an opportunity for companies with market power to use their leverage to the disadvantage of their competitors as well as songwriters.  It takes considerable capital to pay the filing fees  to the Copyright Office and purchase data from the Library of Congress in order to arbitrage this loophole.

2. Take Down the Recordings:  There are any one of a number of ways that the terms of a typical interactive music service license can be interpreted to allow the sound recording owner to pull recordings by at least current roster artists, especially new releases written by artist/songwriters (including co-writes) who complain to their labels.

3.  Take Down the Songs:  Direct licenses from music publishers presumably have some clause that will allow the publishers to stop mass NOI filings for their catalog, particularly of the type that creates a nonexistent distinction between versions of a song that have been retititled–not by the songwriter or publisher but by the artist or record company because the versions of the recording are different even though the song remains the same.

4.  Counterfeits or Bootlegs (including stream rips):  Statutory licenses are only available for sound recordings distributed under the authority of the copyright owner.  There are a number of NOIs that look suspiciously like bootlegs or counterfeits, some of which may have been stream ripped.  As Google is presumably sending NOIs for YouTube Red or other on-demand service.

5.  Congressional Investigation to Stop the Library of Congress Selling Data for NOIs:  The LOC has no business selling what is obviously incomplete data or misleading data to a user who so obviously is using it for a harmful purpose.  The LOC could stop that immediately if they were so instructed by the Congress, and in any event the Congress should investigate.

6. Use Webform to Update or File Your Address Including Excel File Link:  The Copyright Office has a webform for email contact by the public available here.  You can use this to file your address and link to your catalog in an Excel file (hosted on your website or blog).  Such correspondence is likely subject to FOIA (and therefore part of the public records of the Copyright Office), but you can also state in your webform that you are submitting the information with the intention that it become public and demand that your information be provided to anyone submitting a mass NOI as part of the LOC data dump.

The point that seems to have escaped Google and Amazon is that this loophole will surely be stopped, but what won’t be stopped is the complete lack of moral compass that would drive megacorporations to run roughshod over songwriters that they so aptly demonstrate.