How Will the Music Modernization Act's Mechanical Licensing Collective Work?

Two of the four parts of the MMA apply to sound recordings and two parts to songs. The sound recording parts are well-known ground. Title III essentially codifies current practices by SoundExchange regarding a producer share of statutory performance royalties. Title II affords certain rights to digital public performance royalties for pre-1972 recordings that was the subject of The Turtles' groundbreaking lawsuits against SiriusXM and Pandora Media. While not accorded its own title, §§104 and 105 of Title I contain process reforms to the ASCAP and BMI consent decrees similar to the Songwriter Equity Act of 2015. These three parts are largely self-executing following enactment.

Mechanical Licensing Collective

The rest of Title I, however, mandates a limited blanket mechanical license to be administered by a newly created mechanical licensing collective (required by statute to be a private, non-profit business organization). Title I is extremely complex and comprises approximately 149 of the 186 pages of HR 1551, five times longer than was the entire 1909 Copyright Act.

And there are regulations yet to come. The MMA mandates a host of Copyright Office regulations. And that does not include the regulations that the Copyright Royalty Judges may adopt to address administrative assessments.

In addition, no one knows how much of the collective's costs will be borne by the blanket licensees together or individually. Songwriters have been promised rising income due to the process reforms of the ASCAP and BMI consent decrees, the shift to the "willing buyer/willing seller" rate standard, MMA §102(c)(1)(F), and cost shifting. We shall see.

(The "new" rate standard is actually a version of the "old" standard in 17 U.S.C. §801(b). Because the new code section requires the Copyright Royalty Judges to take into account "the relative roles of the copyright owner and the compulsory licensee in the copyrighted work and the service made available to the public with respect to the relative creative contribution, technological contribution, capital investment, cost, and risk." The administrative assessment is, of course, a "cost" of the compulsory license, which may result in the services giving with one hand and taking away with the other if they present the assessment as an element that should reduce royalty rates. The issue did not come up before because both sides bore their own costs.)

The administrative assessment may result in a saving of some administrative costs on mechanical royalties — however, hidden costs arise from compliance due to formalities. Failing to claim each song with the collective may cause unmatched revenues to go into the "black box" (which has a contentious history). Anyone who has transferred ownership of a song catalog will understand — and the collective applies to the entire global catalog of songs past and future from all languages and cultures.

The Collective's Authority

The MMA's consent decree reforms, such as changing the rate court from a single judge to the wheel system of random assignment, may with luck result in higher performance royalties considering the ASCAP and BMI rate courts have not gone well for songwriters in the Internet era. However, the cases are still to be heard in the same courthouse, and the wheel turns 360 degrees — so it's possible that ASCAP and BMI could still be assigned the very judges they used an act of Congress to avoid.

As part of the Title I mandate, the "authorities and functions" of the collective are many, MMA §102(d)(3)(C), but include these practical elements, any one of which is easy to write but not to execute:

• Administering the blanket compulsory license for "covered activities" including claiming for unmatched royalties (e., the "black box");
• Creating and prospectively updating a global rights database;
• Receiving royalty payments from all blanket licensees and administering royalty payments to copyright owners or their administrators;
• Distributing "black box" or unmatched mechanical royalties on a market share basis (which is very similar to current practices); and
• Conducting royalty compliance examinations of all blanket licensees once a year for the billions and soon to be trillions of streams in the prior three years (again, a very similar provision to the historical practice for physical goods).

Crucially, the collective and blanket license applies to all songs ever written or that ever will be written that are exploited in the United States — not only U.S. works. Unlike many collecting societies around the world, there is no "opt out," except through voluntary licenses if one is offered by a blanket licensee outside of the statutory license.

Key MMA Provisions

We will review a selection of issues arising from Title I of interest to practitioners based on reactions to my discussions and lectures.

Publishing Administrators: It is likely that sums paid by the collective will be subject to an administration fee when received by a publisher or administrator unless carved out. Carve outs will be unlikely given the new compliance work that the publisher or administrator must undertake.

Reachback Safe Harbor: Title I's reachback safe harbor is earthshattering — and of questionable Constitutional provenance. It eliminates the ability of copyright owners — especially small copyright owners — to sue infringers like Spotify for statutory damages, attorneys' fees or injunctions, for infringements arising before enactment of the MMA if the "digital music provider" takes the blanket license after enactment of the MMA. Money damages are limited to payable royalties only.

To reiterate: The reachback safe harbor bars claims for infringement lawsuits filed after Jan. 1, 2018, even if the claim arose before that date and is still within the statute of limitations. Realize that the MMA was initially introduced on Dec. 21, 2017 — 11 days before the proposed reachback period commenced. A public copy of the bill was not available until after the reachback nominally started.

Vendors to the MLC: If your client is a vendor to the MLC, realize that if in the unlikely event the entity once designated as the MLC by the Register of Copyrights is found to be wanting in a future review, the Register may appoint a new MLC. In that case, the Register may "transfer … licenses, funds, records, data, and administrative responsibilities from the existing mechanical licensing collective to the new entity." Any intellectual property of the vendor should be clearly delineated to avoid the government deciding that it should be unexpectedly taken and transferred to a new entity, or mandate the assignment of the vendor's contract to that new entity, apparently without compensation to the vendor.

Will the Mechanical Licensing Collective Become Duplicative?: ASCAP and BMI already license the song performance right for the same songs, to the same anticipated blanket licensees, for the same performances under antitrust supervision of the government. The collective will license the corresponding "streaming mechanical" for the same work but gets an antitrust exemption.

Why aren't the performance rights organizations (PROs) offering a one-stop license for all rights as in other jurisdictions? The government prohibits at least ASCAP doing so under the 77-year-old consent decree. So the MLC gets an antitrust exemption on streaming mechanicals, but government supervision controls the performance side of the identical transmission.

This is even more Kafka-esque because the new head of the government antitrust division is reviewing the ASCAP and BMI consent decrees to possibly end them. This did not sit well with the broadcasters or Senator Richard Blumenthal, and the MMA now requires that the Antitrust Division brief Congress on any proposed changes applicable to songwriters. But clearly, if songwriters are freed from the consent decrees, a single license for covered activities is much more practical.

Designation of MLC: The Register designates the MLC — but may only select a nonprofit created by copyright owners that "is endorsed by and enjoys substantial support from musical works copyright owners that together represent the greatest percentage of the licensor market for uses of such works in covered activities, as measured over the preceding 3 full calendar years," (emphasis added) that can demonstrate to the Register that is has the ability to do the work.

MLC Business Plan and Budget: No one has provided a business plan or a budget for the collective. When asked directly by Chairman Grassley in the Senate Judiciary Committee, the head of the Digital Media Association could not provide a cost and instead relied on estimates from the Congressional Budget Office of between $20 million and $30 million annually.

Initial Administrative Assessment: Realize that the MLC must render statements under the MMA following "the license availability date," which is the January 1 following the date that is two years from enactment. Obviously, the MLC will need to have the systems to meet the accounting deadline. That implies that the MLC's costs are substantially front-loaded, and it needs to start building or contracting for those systems immediately in order to timely render statements in the future.

We are told that the blanket licensees pay for the MLC's costs, and indeed they may eventually do so. But the initial administrative assessment is to be "effective as of the license availability date." Accordingly, the blanket licensees will not pay the initial assessment to the MLC for two years based after enactment under the Congressional Budget Office interpretation.

Given the timing of the MMA's passage and that the Copyright Royalty Judges are not required to even notice the assessment process until nine months after enactment, it appears certain that the assessment would not be paid during the crucial startup period of the MLC's operations. And, of course, the administrative assessment can be appealed to the U.S. Court of Appeals for D.C. Circuit. Any appeal could further delay payment of any assessment.

Black Box: Unclaimed and unmatched royalties are held for three years and then allocated to copyright owners based on market share. This has been a major point of contention for independent songwriters. It is also relevant for the payment of assessments, and especially the initial administrative assessment because of this MMA clause:

"INTERIM APPLICATION OF ACCRUED ROYALTIES. — In the event that the administrative assessment, together with any funding from voluntary contributions … is inadequate to cover current collective total costs, the collective, with approval of its board of directors, may apply unclaimed accrued royalties on an interim basis to defray such costs, subject to future reimbursement of such royalties from future collections of the assessment." (Emphases added.)

The MMA does not require the initial administrative assessment to be paid in time to cover the MLC's startup costs. It seems quite likely that the collective may cover these pre-assessment costs to invade any black box money it collects. Amounts deducted may be replenished in future assessments, if permitted by the Copyright Royalty Judges.

Digital Licensee Coordinator: Under the MMA, a Digital Licensee Coordinator (DLC) is appointed by the Register to represent the blanket licensees, relying on mirror language for appointment of the MLC except that the companies involved are Amazon, Apple, Google and Spotify — some of the largest in commercial history, unlike the music publishers. This raises competition concerns and conflicts of interest because the DLC also allocates the assessment among the blanket licensees and can charge membership fees. Little discussed is the effect on startups of the DLC assessment structure and control. What if startups cannot afford their assessment? Are they denied the blanket? There is no answer at present.

Rate Standard: A new government mandated rate standard (called "willing buyer/willing seller") is intended to result in higher royalties for songwriters. However, blanket licensees may be able to request that the Copyright Royalty Judges give a reduction in royalty rates under this new standard based on the Copyright Royalty Judges' assessment of the operating costs for the MLC. We'll see.

Governance: The MLC's board is to comprise 14 voting members made up of 10 publishers and four "professional songwriters." The European Songwriter & Composers Alliance has criticized the structure as out of step with industry practice of at least equal representation of songwriters.

Nonvoting Board Members: The DLC appears to have a non-voting board membership. Note that this means that the DLC will likely have a right to information and to attend board meetings. This may have an effect on attorney-client information, litigation or royalty setting strategy.

Claiming/Registration: It is unclear how song metadata gets into the new global rights database as a practical matter, but that process formality appears to be the collective's responsibility. Even if the MLC doesn't charge for registration, there will still be a compliance transaction cost on copyright owners to register metadata and splits with the collective and then confirm it was properly ingested.

Note that both publishers and labels are required to deliver song and sound recording ownership data to the collective in considerable detail. Compliance costs borne by record companies large and small should be reimbursed as a cost of the collective included in an assessment, but currently is not. It may be possible to correct this oversight in regulations.

Voluntary Licenses: Services and copyright owners may enter voluntary licenses outside of the MLC. (Voluntary license payments likely won't get black-boxed.) These voluntary licenses presumably include catalog licenses as well as modified compulsory licenses (such as the typical Harry Fox Agency license) whenever made. Voluntary licenses suggest that the MLC will only administer songs that are subject to the blanket. However, because there is no opt out, digital music providers could refuse to renew a catalog license and then take that catalog under the blanket without paying a minimum guarantee.

Accountings: Payment obligations of digital music providers are clearly spelled out in the MMA more or less consistent with current practice, but payment obligations of the MLC to copyright owners are not specified, other than black box.

Audits: Only the MLC may audit the blanket licensees. Only copyright owners may audit the MLC. However, audits must be conducted by certified public accountants and those auditors are obligated to look for overpayments — which probably violates a CPA's duty of loyalty. As Warner Music Group's Ron Wilcox testified to the Copyright Royalty Judges: "Because royalty audits require extensive technical and industry-specific expertise, in WMG's experience a CPA certification is not generally a requirement for conducting such audits. To my knowledge, some of the most experienced and knowledgeable royalty auditors in the music industry are not CPAs."

It is also important to note that the collective may only audit once a year for the prior three years. Given that there will be billions of transactions subject to audit (and eventually trillions in a three year period), it is unlikely that CPAs will be conducting census level audits. Projections and lump sum payments are likely, and lump sum payments tend to be distributed in the old-school method of market share distributions.

Not to be cynical, but if you are struggling to find what is "modern" about the "Music Modernization Act," you are not alone.

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Chris Castle is founder of Christian L. Castle, Attorneys in Austin. He divides his time between advising creators in the music industry, representing innovative music tech startups on music rights issues and addressing public policy matters relating to copyright and artist rights. For more information: www.christiancastle.com.