What Principles Apply to Agents? Who Audits the Auditors?

“Quis custodiet ipsos custodes?”
Decimus Junius Juvenalis, Satires, Satire VI, lines 347–8.

According to Digital Music News, “Google has just tapped the Harry Fox Agency (HFA) to handle certain music-related licensing and administration services for Google Play.”

Depending on what this means, it raises some interesting questions.  As agents for its publisher principals, HFA has been trusted with vast amounts of metadata that many believe more than arguably belong to its tens of thousands of music publishers large and small.  Not only has HFA been trusted with that information, at no time I can think of has that information been of greater value to publishers and songwriters.  Those would be the principals for which HFA is the agent (the “A” in “HFA”).

Agents have lots of duties of loyalty, fiduciary duties, many duties, particularly when they hold themselves out has being the true servant of their principal.  That was all fine as long as HFA was on the same side of the transaction as their principals.

It now appears both due to the company’s rather cloudy role in the RightsFlow transaction and this current story in Digital Music News that HFA’s role is shifting to representing the licensee rather than the licensor at least in some instances.  Or perhaps both the licensee and the licensor.  We call this an “ethical wall” in the law.  In fairness, we should assume that the vast majority of HFA’s business is still in representing licensors and I would also assume that licensors have a far, far better chance of being paid accurately by HFA than by anybody else.  At least to the extent that HFA is provided by the licensee with accurate information in the first place.

My view is that the main value to publishers of using a collective like HFA (or ASCAP, BMI, SESAC, or SoundExchange) is to offload the burden of licensing under the compulsory license available in the US (under 17 U.S.C. 115 for songs or 114(g) for sound recordings for those reading along).  But licensors can do that work themselves if need be, burdensome though it may be.

However, in my view the unique value of using a collective is the ability to audit licensees (like Google) on behalf of a number of publishers, perhaps thousands of publishers and tens of thousands of songs.  This is the ability to audit as a group (or more broadly put, to act collectively to enforce their common rights at a market clearing price).  To conduct an “audit” which is really a royalty examination (not a “financial audit” strictly speaking), there logically must be enough money at stake for a single rights holder to conduct the audit.

I would suggest that the importance of the HFA standard license is that it modified the compulsory license (which does not lay out a procedure for a traditional audit in the regulations as currently drafted, i.e., 37 CFR Sec. 201.19) and gave certain benefits to the licensee not available under the compulsory license (quarterly instead of monthly accounting, for example).  This was arguably in return for the licensee agreeing to certain burdens such as agreeing to be subject to an HFA audit.  Having been on the receiving end of HFA audits in the past, I can tell you that their record company audits were something to behold and really set the standard for the industry to the great benefit of songwriters.

As we have seen with the push for direct licensing in some quarters and the union-busting activities of Google, The Man 2.0 does not like artists and songwriters to organize and the tech oligarchs are incented to stop this pesky organizing and auditing in every way they can.

So if HFA is going to start working for Google, then who will audit HFA’s royalty statements on behalf of their publishers?  And if Google owns Rightsflow, then does that not obviously create several different moral hazards, especially for songwriters and digital retailers who compete with Google Music/Play/Whatever?

Will Google agree to be audited by somone standing in HFA’s shoes, or will HFA discourage its principals from requiring an audit right against Google when HFA is rendering statements?  Or alternatively, will HFA purport to conduct an “independent” audit of itself and would anyone trust it any more than they would an accounting from Google Play’s Rightsflow, certified or otherwise?

2 thoughts on “What Principles Apply to Agents? Who Audits the Auditors?

  1. As always, a great insight to what the real issues are for people who work in music. Question – you mention that Google is involved in “union-busting”. Where can I start my research to get the details of that allegation? Of course I Googled that phrase and similar ones and got nothing!
    Best,
    David

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