Christian L. Castle
Admitted in California and Texas
January 5, 2023
General Counsel and Associate Register of Copyrights
U.S. Copyright Office
101 Independence Avenue S.E.
Washington D.C. 20559
Re: Notice of Proposed Rulemaking: Termination Rights and the Music Modernization Act’s Blanket License
Docket No. 2022-5 Comment
Dear General Counsel Wilson:
Thank you for the opportunity to make this comment on the docket referenced above.[i]
I am a music lawyer in Austin, Texas and write this comment on my own behalf only and not on behalf of anyone else.
Others will address the substantive termination issues that are well-described and assayed in the Notice, so I will focus on the procedural tension between The Mechanical Licensing Collective, Inc. (“The MLC, Inc.”) currently designated as the mechanical licensing collective (“MLC”), its officers and directors, and the law as described in the Notice.
I argue that the need for this Notice is symptomatic of a larger problem in the relationship between Congress and The MLC, Inc. I hope the Office will consider resolving this tension as it has been authorized to do under the Music Modernization Act[ii] such as through regulations establishing the type of code of conduct that is common for other federal contractors.
This tension is alarming. The Notice states the MLC “does not follow the Office’s rulemaking guidance”[iii] regarding terminations, and that The MLC, Inc. “declin[es] to heed the Office’s warning….”[iv] These disclosures are diametrically at odds with the clear intent of Congress in crafting the MLC’s role.[v]
The disclosures confirm clearly that there are governance and oversight controversies at The MLC, Inc. that in my view need to be conclusively disposed of, and quickly.[vi] These governance issues are symptomatic of what may be much greater problems with the administrative capabilities of The MLC, Inc. that may be metastasizing but have not yet risen to the level of a public inquiry.
The recklessness that gives rise to the Notice also highlights The MLC, Inc.’s general lack of accountability and suggests a conscious disregard for the Copyright Office’s oversight role on a significant matter of law that is not capable of proper resolution through any “business rules.”[vii]
I also note this troubling statement in the Notice:
But, having reviewed the MLC’s policy, the Office is concerned that it conflicts with the MMA, which requires that the MLC’s dispute policies ‘‘shall not affect any legal or equitable rights or remedies available to any copyright owner or songwriter concerning ownership of, and entitlement to royalties for, a musical work.’’[viii]
It seems clear that The MLC, Inc.’s conscious failure to comply with Congressional intent as well as the Office’s guidance is, or ought to be, a decision of some import that surely must have been taken by someone—that is, one or more persons—employed or appointed by the MLC. It seems likely to be a subject that would have been reviewed both by its General Counsel and as part of the millions in outside counsel fees[ix] spent by The MLC, Inc.
The fact that the decision-making process is not readily known is itself of concern and leads one to further consider developing a code of conduct for The MLC, Inc. to assure the Office, the Congress and the public of its administrative capabilities.
Respectfully, I request that you determine how this decision was arrived at and what internal controls The MLC, Inc. has put in place to assure the Congress, the Office and interested parties that these mistakes will not happen again. This should not be an “oh well” moment and should be taken seriously by The MLC, Inc.
If The MLC, Inc. fails to disclose what it is doing by establishing opaque “business rules”, it is essentially creating de facto regulations that have the practical effect of law or regulations made behind closed doors unless the Office or other oversight agency happens to catch them out. The public will never know that the business rule was established, how the “business rule” was arrived at, or have a meaningful opportunity to comment such as in response to this Notice.
For example, do the minutes of The MLC, Inc.’s board of directors or statutory committees reflect a discussion or vote on the adoption of the MLC’s policies on termination treatment? Did such a vote implicate any conflicts of interest? Who determined that there was or was not a conflict of interest in the MLC’s decision to adopt the termination policy, however it was taken? Were there any dissenting votes recorded? Did an officer or director of The MLC, Inc. certify the completeness of the record in these findings in the corporate minute book?
This leads to other concerns under public discussion regarding the hundreds of millions of “black box” monies being held by The MLC, Inc. Given that the public has very little information available to it regarding the results and implications of the MLC’s operational decisions, I respectfully request that you determine what, if any, financial implications have arisen as a result of The MLC, Inc.’s reckless failure to comply with the law and the guidance of the Office in implementing its termination policy. Such determination should likely include any funds[x] that The MLC, Inc. is apparently trading in the market for its own account.[xi] Any curative action required by the Office should, of course, be retroactive in scope which will require considerable before-and-after accounting disclosures.
It must be asked whether the “business rule” established for terminations increases or decreases the enormous black box which was of considerable interest to Chairman Leahy at the recent Copyright Office oversight hearing at which the Register testified.[xii] This is particularly true if the implementation of the business rule results in financial harm to interested parties who rely on The MLC, Inc. to get it right.
The subject of black box came up in the Questions for the Record from Chairman Leahy. The Copyright Office’s response to Chairman Leahy’s inquiry about the hundreds of millions in black box held by the MLC directed the Chairman to the MLC’s annual report for answers.
Respectfully, I find this odd. Chairman Leahy did not ask what the MLC told the world in its annual report; rather he asked, “What can the Copyright Office do to help ensure that the MLC is working to make sure that rightful owners of music works are identified and paid?”[xiii] The question is transitive: We have oversight of you, you have oversight of The MLC, Inc., therefore we have oversight of the MLC.
Surely no one is surprised by this. The question many have is why The MLC, Inc. itself—a quasigovernmental organization operated by inferior officers[xiv] of the United States–is not the subject of an oversight hearing at Senate Judiciary regarding the hundreds of millions it is sitting on. Maybe next time.
It must also be said that the answer to Chairman Leahy goes on:
Notably, the MLC plans to wait to process historical unmatched royalties from the Phonorecords III rate period [2018-2022] until the Copyright Royalty Judges finalize those rates in the ongoing remand proceeding and digital music providers provide adjusted reports of usage and royalty payments. It is the Office’s understanding that the bulk of historical unmatched royalties come from that period.[xv]
Without getting into the timeline of what came when, how is it exactly that The MLC, Inc. took the decision in February 2021—nearly two years ago–to sit on top of hundreds of millions of other peoples’ money that they were somehow investing under their undisclosed “Investment Policy”? Was anyone asked? Who gave the MLC the permission to do this? Do they not hold the black box corpus in trust for songwriters and copyright owners yet to be identified? Does this not compound the already painful series of failures that resulted in the black box in the first place, the delay in accounting to songwriters (or their families) under Phonorecords III remand, and still more delay while legions of lobbyists and lawyers argue over the post-remand true up accountings?
Respectfully, there is also, of course, a larger question that the Office may consider answering: If The MLC, Inc. adopts a policy or takes some action outside of the law or its remit, is that policy binding on any future entities designated by the Office as the MLC?
These are all questions that I would expect to have answers that are readily available to the public given that The MLC, Inc. is in a position of public trust administering a compulsory license on behalf of the United States and has been given great privileges under the MMA.[xvi]
Thank you again for the opportunity to comment.
Very truly yours,
Christian L. Castle
[i] U.S. Copyright Office, Notice of Proposed Rulemaking, Termination Rights and the Music Modernization Act’s Blanket License 87 FR 64405 (Oct. 25, 2022) (Doc. No. 2022-5) (hereafter “Notice”).
[ii] Orrin G. Hatch-Bob Goodlatte Music Modernization Act, Public Law 115–264, 132 Stat. 3676 (2018) (“MMA”) and specifically Title I thereof.
[iii] Notice at 64407.
[v] See S. Rep. 115-339 (115th Cong. 2nd Sess. Sept. 17, 2018) at 7 (“Senate Report”). (“The collective is expected to operate in a transparent and accountable manner.”)
[vi] I would hope that this failure will be weighed and measured by the Copyright Office as part of The MLC, Inc.’s quinquennial review as is required under the legislative history. See, e.g., Senate Report at 5 (“[E]vidence of fraud, waste, or abuse, including the failure to follow the relevant regulations adopted by the Copyright Office, over the prior five years should raise serious concerns within the Copyright Office as to whether that same entity has the administrative capabilities necessary to perform the required functions of the collective.”)(emphasis added).
[vii] It must be said that the MLC’s disregard for this particular matter may present a moral hazard (at best) for the publishers represented by at least some of its board members.
[viii] Notice at 64407 (emphasis added).
[ix] Annual Report at 16.
[x] See the MLC’s annual report stating that the MLC invests the black box according to its internal “Investment Policy” established by its board of directors but not made public. MLC 2021 Annual Report at p. 4 available at https://www.themlc.com/hubfs/Marketing/23856%20The%20MLC%20AR2021%206-30%20REFRESH%20COMBINED.pdf(“Annual Report”) (“Investment Policy: This policy covers the investment of royalty and assessment funds, respectively, and sets forth The MLC’s goals and objectives in establishing policies to implement The MLC’s investment strategy. The anti-comingling policy required by 17 U.S.C. § 115(d)(3)(D)(ix)(I)(cc) is contained in [The MLC, Inc.’s] Investment Policy. The Investment Policy was approved by the Board in January 2021.”) (emphasis added).
[xi] Realize that every CMO is confronted with the decision about what to do with the royalty float and black box, but not every CMO decides to invest these funds in the market. If they do invest the funds, it is generally the case that any trading profits, dividends or interest goes to offset the CMO’s administrative costs that otherwise would be deducted from collected royalties. However, the MLC, Inc.’s administrative costs are paid by the users of the blanket license (making the United States, I believe, the only country in history or the world that charges for the use of a statutory license). Therefore, the return on the MLC’s investment of the songwriters’ money would not be used for the same purpose as all the world’s CMOs that follow a similar practice. The continuity in ownership for profits derived from The MLC, Inc.’s trading is also unclear; if The MLC, Inc.’s existing designation is not continued but securities are being held or profits generated, what happens?
[xii] Senate Judiciary Committee, Subcommittee on Intellectual Property, Oversight of the U.S. Copyright Office, Responses to Questions for the Record by Shira Perlmutter, Register of Copyrights and Director of the Copyright Office (Sept. 7, 2022), available at https://artistrightswatchdotcom.files.wordpress.com/2022/10/qfr-responses-perlmutter-2022-09-07.pdf. (“Questions for the Record”) (“With respect to the historical, pre-2021, unmatched royalties, which were reported to be about $426 million, the annual report says that the MLC recently started distributing those that it has been able to match. It also says that the MLC has begun making associated usage data for historical unmatched royalties available to copyright owners, which will facilitate further claiming and matching.”)
[xiii] Id. at 4.
[xiv] President Donald J. Trump, Statement on Signing the Orrin G. Hatch-Bob Goodlatte Music Modernization Act (October 11, 2018) available at https://www.govinfo.gov/content/pkg/DCPD-201800692/pdf/DCPD-201800692.pdf (“Because the directors are inferior officers under the Appointments Clause of the Constitution, the Librarian must approve each subsequent selection of a new director.”)
[xv] Questions for the Record at 4.
[xvi] See, e.g., Senate Report at 5 (emphasis added). “For the responsibilities described in subparagraphs (J) [distribution of unclaimed royalties] and (K) [dispute resolution] of paragraph (3), the collective is only liable to a party for its actions if the collective is grossly negligent in carrying out the policies and procedures adopted by the Board of Directors pursuant to section 115(d)(11)(D). Since the Register has broad regulatory authority under paragraph (12) of subsection (d), it is expected that such policies and procedures will be thoroughly reviewed by the Register to ensure the fair treatment of interested parties in such proceedings given the high bar in seeking redress.”