Congress seems very interested in The MLC, Inc.’s business rules the company granted itself. These various powers have the force of law with essentially no due process. Congress permits The MLC, Inc. to operate within certain very limited guidelines, particularly when it comes to The MLC, Inc.’s quasi-governmental operations involving the database and royalties, particularly unmatched royalties. So when The MLC, Inc. takes a decision or establishes a business rule involving these statutory subjects, they need to be able to point to the statutory authority for that action where Congress allows that action. That authority will either be in the Music Modernization Act (now part of the Copyright Act) or regulations established by the Copyright Office. Any MLC board action or business rule on these statutory subjects not grounded in statute or regulation must give way.
Establishing guard rails for the mechanical licensing collective is exactly the kind of responsible approach that Congress would take. Otherwise it would look like Congress was creating a private company (nonprofit or otherwise) that would be allowed to make it up on the fly to do things through a cutout that Congress itself would not be allowed to do, a kind of Temporary Autonomous Zone.
What has become more apparent is that in some of its business rules, The MLC, Inc. may have breached the guard rails. One example that was the focus of the recent field hearing by the House IP Subcommittee conducted by Chairman Issa is the purported “Investment Policy” established by the board of the MLC. Under questioning by Rep. Cline of the Subcommittee, the MLC’s CEO Kris Ahrend testified that these investment practices were authorized by that board presumably on the advice of counsel who may have drafted the investment policy. Others may have been involved and perhaps a vote was taken or minutes approved with the knowledge of nonvoting members as will be hopefully be evidenced by applicable board minutes.
This “Investment Policy” first became public to my knowledge in The MLC, Inc.’s 2021 Annual Report. The MLC, Inc.’s 2021 Annual Report refers to but does not disclose an “Investment Policy” that “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.” (See 2021 Annual Report, Appendix at p 4.)
“Royalty funds” apparently refers to both the black box and the “float” meaning royalties invoiced and received but not yet paid out to songwriters and publishers. “Assessment funds” likely refers to The MLC, Inc.’s inflation-adjusted operating funds received from music users per the Copyright Royalty Judges but not spent during the corresponding assessment period, including any underage, i.e., monies paid by music users (large and small) that was intended to cover the cost of operating The MLC, Inc. but were not needed and were not recredited to reduce future assessments. That’s right, lawlessness and free money are a heady combination. But I digress.
Apparently the MLC, Inc. is investing all these funds in publicly traded securities. As stated at Part X Line 11 of The MLC, Inc’s 2021 tax return, the company had holdings of publicly traded securities of $656,426,580 as of 12/31/21. This number was probably a combination of all of black box (including $424 million paid by the services), float and unspent assessment monies, but we don’t really know. Someone knows, just not us. Or Congress for that matter.
What statutory authority exists for this apparent stock trading? I have found none. Congress did address the issue in 17 USC 115(d)(3)(G) which the lobbyists drafted to say:
(G)Collection and distribution of royalties.—
(i)In general.—Upon receiving reports of usage and payments of royalties from digital music providers for covered activities, the mechanical licensing collective shall—
(aa) identify the musical works embodied in sound recordings reflected in such reports, and the copyright owners of such musical works (and shares thereof);
(bb) confirm uses of musical works subject to voluntary licenses and individual download licenses, and the corresponding pro rata amounts to be deducted from royalties that would otherwise be due under the blanket license; and
(cc) confirm proper payment of royalties due;
(II) distribute royalties to copyright owners in accordance with the usage and other information contained in such reports, as well as the ownership and other information contained in the records of the collective; and
(III)deposit into an interest-bearing account, as provided in subparagraph (H)(ii), royalties that cannot be distributed due to—
(aa) an inability to identify or locate a copyright owner of a musical work (or share thereof); or
(bb) a pending dispute before the dispute resolution committee of the mechanical licensing collective.
Let’s focus on that last bit–if the collective cannot identify (1) the songs (2) the owners of the songs and (3) the owners of the shares of the songs and then (4) distribute royalties to those copyright owners, then the collective can hire a registered broker-dealer and start trading stock using that money.
Ah, no it actually doesn’t say anything about stock trading. The statute directs The MLC, Inc. to do the opposite. The company is directed to deposit those royalties into an interest-bearing account as described in “subparagraph (H)(ii)”. Maybe that’s where the stock trading authority is located?
Not really. Again, the opposite seems true. Subparagraph (H)(ii) says:
(ii)Interest-bearing account.—Accrued royalties for unmatched works (and shares thereof) shall be maintained by the mechanical licensing collective in an interest-bearing account that earns monthly interest—
(I) at the Federal, short-term rate; and
(II) that accrues for the benefit of copyright owners entitled to payment of such accrued royalties.
So it seems that any business rule that says otherwise, such as the MLC, Inc.’s Investment Policy, is hostile to the statute, and, in the absence of a saving regulation (of which there is none, because it, too, would be hostile to the statute), must give way. Indeed, there’s an argument that any action taken under that hostile business rule must be undone including any tax filings.
This may not be the end of the story. It is clear that Congress acted prudently in a situation where capital should be preserved when the identity of the lawful recipients of those black box monies were unknown. Put the money into a bank account for the benefit of the copyright owners (presumably separate accounts by song to preserve FDIC protection). This would also be the source of a duty to those copyright owners.
Rep. Cline raised the question to Mr. Ahrend of investment profit and loss, too (which presupposes the authority to invest in the first place):
Mr. Cline: I understand that royalty funds may be invested. Have royalty funds actually been used for this purpose and if so how will the MLC handle any profits or losses stemming from investments?
I think what Mr. Cline meant by “may be invested” was not “may” as an auxiliary verb of permission, but rather “may” as in “may have been”. But Mr. Ahrend did not answer that part of his question. Presumably the MLC, Inc.’s investment policy covers the issue of both profit and loss. Particularly since it’s unclear who covers the losses unless the board passes the hat (which is when the distinction between voting and nonvoting may be even more relevant).
If a registered broker dealer were to invest those funds instead of following the statute, what then? They don’t know who they are investing for (not The MLC, Inc., clearly–if there’s one thing we know, we know it’s not their money). What is that stock broker’s duty under the SEC rules?
Someone knows.
In the normal case, funds like the black box would be turned over to states under an ancient process called escheatment. Indeed, this is exactly what happened in New York state with $50 million of unidentified royalties in 2004. There is a prohibition on escheatment in the MMA which many believe will preempt state unclaimed property laws. However, one might distinguish preemption when the federal government itself acts compared to the federal government delegating the Constitutional preemption authority to a private company.
We’ll have to see how all this turns out, Ollie, but so far it looks like another fine mess.
Music Technology Policy 