As most songwriters are aware, song licensing for digital music services is a mess, mostly due to the fact that digital services fail to follow the rules.  Well…not quite.  They follow the rules that suit them and fail to follow the rules when it doesn’t.

(Remember–the statutory license is not just mechanical royalties for CDs, but also includes on-demand streaming audio, like Spotify, and after the latest negotiation, a bunch of other services, too.)

Publishers have been steamrolled into letting the services get away with this, and it has created a huge mess.  This, by the way, is a different huge mess than the YouTube huge mess we posted about recently.  And this is again different than the huge mess for composers resulting from YouTube’s desire to use “user generated” clips from movies and TV shows without providing the PROs with sufficient information to track the uses or apply cue sheets.

So this is a third black box.

Fortunately, the Copyright Office has the opportunity address the problem.  Because of the history of the regulations applicable to these accountings, the current regulations are a hacker’s paradise.  Why?  The main reason is because the U.S. Copyright Act does not afford songwriters an audit right under a statutory license.

Impossible you say?  Not at all.  This is one of the main reasons why the Harry Fox Agency license was the preferred licensing mechanism for decades–the HFA license modifies the terms of the Copyright Act and in consideration for granting quarterly instead of monthly accountings and a few other things, songwriters get the right to audit (or have their administrator audit, more likely.)

If a songwriter is also an artist and is subject to a controlled compositions clause in a record deal, the writer/artist also get the right to audit.

In fact, the only time that a songwriter doesn’t get a right to audit is in (1) a statutory license, or (2) and independent publisher deal with YouTube.

The statutory license comes with regulations that require a monthly statement of account be sent to the songwriter (technically, the copyright owner) that is certified by the retailer.  This means that an officer of the company has to swear that the statement is correct:

Oath and signature. Each Monthly Statement of Account shall include the handwritten signature of the compulsory licensee. If that compulsory licensee is a corporation, the signature shall be that of a duly authorized officer of the corporation [swearing to] the following statement:

I certify that I have examined this Monthly Statement of Account and that all statements of fact contained herein are true, complete, and correct to the best of my knowledge, information, and belief, and are made in good faith.

Now understand–if an officer of the company certifies something, they are taking personal responsibility for the statement.  Meaning that if they are wrong–for example if they lie–it’s the kind of thing that can ruin your whole day.

I’m not aware of any digital retailer that has provided these monthly statements.

Once a year, the statute requires that a certified public accountant review the books and provide a certification of their own:

Signature and certification. (i) Each Annual Statement of Account shall include the handwritten signature of the compulsory licensee. If that compulsory licensee is a corporation, the signature shall be that of a duly authorized officer of the corporation; if that compulsory licensee is a partnership, the signature shall be that of a partner. The signature shall be accompanied by: (A) The printed or typewritten name of the person signing the Annual Statement of Account; (B) the date of signature; (C) if the compulsory licensee is a partnership or a corporation, by the title or official position held in the partnership or corporation by the person signing the Annual Statement of Account; and (D) a certification of the capacity of the person signing. (ii)(A) Each Annual Statement of Account shall also be certified by a licensed Certified Public Accountant. Such certification shall consist of the following statement:

We have examined the attached “Annual Statement of Account Under Compulsory License For Making and Distributing Phonorecords” for the fiscal year ended (date) of (name of the compulsory licensee) applicable to phonorecords embodying (title or titles of nondramatic musical works embodied in phonorecords made under the compulsory license) made under the provisions of section 115 of title 17 of the United States Code, as amended by Pub. L. 94-553, and applicable regulations of the United States Copyright Office. Our examination was made in accordance with generally accepted auditing standards and accordingly, included tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion the Annual Statement of Account referred to above presents fairly the number of phonorecords embodying each of the above-identified nondramatic musical works made under compulsory license and voluntarily distributed by (name of the compulsory licensee) during the fiscal year ending (date), and the amount of royalties applicable thereto under such compulsory license, on a consistent basis and in accordance with the above cited law and applicable regulations published thereunder.

You can understand why the Copyright Office would want to see a CPA authorize these statements, right?  Because if a CPA is caught playing footsie with the retailer, that really is the kind of thing that can be a life changing event.  Of course the regulations don’t address who hires the CPA and the moral hazard that a CPA hired by the retailer would have if they thought that there were problems with the statements.

But no audit right–the CPA functionally stands in the shoes of the artist’s auditor.

Yes–David Lowery got it very, very right.  The new boss is way, way worse than the old boss.

The Copyright Office is currently considering new regulations to cover the digital services (as well as physical) so I filed some comments about it with the Copyright Office.

The following is an excerpt with my recommendations–you may find it interesting.

Suggested Revisions to Certification Standards

I would respectfully remind the Copyright Office that the proposed regulations are essentially creating a substitute for transparency of the industry standard royalty compliance examination.  Therefore, the certifying CPA should expect to disclose and certify information that will help copyright owners both large and small understand what has happened inside of what is all too frequently perceived to be a black box.

I respectfully suggest that the following be considered for mandatory questions to be answered publicly by the certifying CPA:

(a)  Has the licensee represented to the CPA that it has complied with all statutory requirements for obtaining a valid Section 115 compulsory license for all songs covered by the CPA’s certification?  This is significant because the CPA cannot certify what the licensee has not licensed;

(b)  Has the CPA confirmed that all of the retailer’s transactions were included on the Statements of Account and have been or are to be reported to all copyright holders on the Annual Statements of Account that the CPA is certifying?

(c)  Are there any earnings held or accrued by the digital retailer for reasons other than an unknown song publisher for the period covered by the certification?

(d)  Are there any earnings held for songs owned by unknown copyright owners?

(e)  Has the digital retail or its third party representatives complied with the rules applicable to any unknown copyright owners for the period covered by the certification including filing a Notice of Intention to Obtain a Compulsory License with the Licensing Division of the Copyright Office?

We respectfully suggest that the Copyright Office consider these concepts when revising the certification requirements for annual statements of account.

Transparent Disclosure of Missing or Unlicensed Works

Another major concern that we have heard from songwriters is that there be some feedback loop in the process so that they can determine whether their works are unlicensed, monies are available for them, or the retailer is unable to find them following a reasonably diligent search.

Each digital retailer should be required to post on its website a public statement of all musical works in the following categories.

(a)  Unlicensed Report:  Works that the retailer has made available to the public but which were not the subject of a notification of intent to use, or which otherwise remains unlicensed.  This would include a list of musical works for which the digital retailer has no contact information for the copyright owner;

(b)  Unallocated/Unclaimed Royalty Report:  Works for which the retailer has sent an NOI, but for which the retailer has failed to pay royalties for whatever reason.  The Unallocated/Unclaimed Report should include amounts for which the retailer has accrued but not paid royalties and which will be transferred to the applicable unclaimed property authorities in the state in which the retailer has its principal place of business;

(c)  Unknown Copyright Owner Report:  Works for which the retailer has been unable to identify the copyright owner.  This report should offer a searchable list and also identify works for which the retailer has filed the appropriate NOI with the Copyright Office.  It may make sense for all retailers to pool these lists into one searchable database so that songwriters would only have to search one database rather than multiple sites they might be unaware of or might contain misspellings.  Such a database would be an ideal activity for an industry-wide group such as the Digital Media Association and would go a long way to restoring songwriter confidence in DiMA members [i.e., members of the Digital Media Association, and that should include NARM members, too, as NARM’s board is dominated by digital retailers]; and

(d)  Unclaimed Property Statutes:  Finally, it would be helpful for songwriters to have a clear understanding of how unpaid or unclaimed royalties would ultimately be paid by the digital retailers to States under applicable unclaimed property statutes.  Thanks to the hard work of a leading artist lawyer, the New York Attorney General conducted an investigation of unpaid record and music publishing royalties in 2004 and determined that over $50 million was available to be paid to creators.  It seems only fair that a similar investigation be conducted into digital retailers and the Copyright Office is in a perfect position to come to the aid of songwriters.

If you have something to say about this, you can contact the Copyright Office in Washington:

Tanya M. Sandros, Deputy General Counsel
U.S. Copyright Office
101 Independence Ave. S.E.
Washington, D.C. 20559-6000
Phone: (202) 707-3000 or 1-877-476-0778 (toll free)