Biting the Hand

Title I of the Music Modernization Act established a five year performance review for the quasi-governmental company appointed by the Register of Copyrights to oversee the operation of the “mechanical licensing collective.” (What is sometimes called a “quango” not to be confused with “quagmire”, “quasi” being from the Latin “as if” and the old English “quag” meaning bog or swamp. That’s right…swamp.).

The statutory language with this quinquennial review is:

The fifth full calendar year starting after the first designation of the MLC, Inc. is this year and the January referenced is this month. So sometime this month, the Copyright Office is required to publish a notice under the Registers signature “soliciting information concerning whether the existing designation should be continued.” This is going to be the first performance review that the public, including songwriters and digital music services, gets to give the MLC, Inc. The statute–written largely by the lobbyists who backed the MLC, Inc. it must be said–clearly contemplates that the Register could fire the quango and replace The MLC, Inc. with a different entity.

Of course, this also means that the Register is going to conduct a review of how well the Register performed in awarding a multi-million dollar government opportunity to the current quango, The MLC, Inc. which just happens to be the horse backed by the lobbyists. So that kind of looks like conflict #1 before you even get out of the gate and turn to asking what influence a Copyright Office employee had on the process who subsequently left government service and was employed by Spotify. Is that conflict #2 or #1A so we may have a manageable number? But rest assured, no one will bring that up. They’d never have lunch in town again.

In case you were wondering when the Copyright Office was going to publish their notice of the quinquennial review, we learned yesterday that having failed to conduct any audits since it was designated, the MLC, Inc. is going to audit everyone all at once. The MLC, Inc. noticed some 49 audits all at once. This requires the Copyright Office to publish notices of each of the audit in the Federal Register 45 days after receipt from the quango. That’s a lot of notices, so you can understand why they would want to let those notices get filed before filing their own redesignation notice since they have the entire month of January to do so–which in Washington means they have until the last minute of the last hour of the last day.

So who is going to pay for the cost of 49 simultaneous audits? The MLC, Inc.’s press release tells us very clearly: “Members of The MLC will not bear any of the audit costs; these will be covered by The MLC’s operational budget, which is funded by DSPs at no cost to songwriters or music publishers under the MMA.” 

That’s right–hold my beer Cicero and Tacitus. Through the overpowering legislative genius of Title I of the Music Modernization Act the MLC will be auditing the DSPs who fund the audit and salaries of the MLC employees who are conducting their audit. This little detail–some might say inherent conflict–seems to have gotten overlooked, kind of like what do you do when the willing buyer and willing seller are the same person. They will be biting the hand that feeds them, and feeds them generously. And if you believe that the cost of the MLC doesn’t have a bearing on the royalties that the DSPs are willing to pay, there’s this bridge in Brooklyn you really should take a look at.

Managing 49 Simultaneous Audits

To my knowledge, no single company has ever before conducted 49 simultaneous royalty audits. In fairness, it’s a huge job and a lot to ask. Given that the bigger companies treat audits like litigation and that the smaller companies may lack an inbound royalty audit staff, these audits will go slowly for different reasons at different companies. This will be particularly true of companies that are being audited for the first time.

Big audits like Spotify, Apple and Amazon each could be expected to take over a year to complete if you were going to actually conduct robust compliance examinations over trillions of transactions. The MLC quango will, of course, hire outside auditors. Not just any auditors, but “experienced outside audit firms.” I will be very interested to see just how many of these firms there are, but my rough justice estimate is that it’s going to take a good five to ten years to finish these 49 audits. 

There’s going to be a great temptation to rely on projections and lump sum settlements to resolve these audits more quickly. Maybe that’s a good idea, or maybe it isn’t. How would you know? You would need something to compare it to. The MLC tells us “Should an audit reveal an underpayment of any amount, The MLC will distribute the full amount of any recovery to the impacted rightsholders, without deducting any audit costs or fees.”

Of course, they would not have the right to deduct “any audit costs or fees” and sold us all on that restriction from the beginning. But if the only thing you know about the audit result is that the MLC decides how much to pay to your publisher, how would you know what the distribution is based on and whether it was done correctly. Trust me, no one will ask you what you think.

And as Winston Smith realized in 1984, “If you want to keep a secret, you must also hide it from yourself.” So there’s that. Wouldn’t you expect that each audit report would be published on the MLC’s website? And that any settlements would have to be approved by the copyright owners concerned?

Who is on First?

Given that we are about to go into a redesignation proceeding, it does seem that there needs to be some explanation of who exactly is hiring all these outside auditors? If it’s The MLC, Inc. doing the hiring, what happens if the lobbyists get fired in the redesignation? Who is on the hook for the auditor’s fees? Who is entitled to receive the recovery or be responsible for the overpayment? I realize that it’s rather improbable given the conflicts within conflicts that the MLC, Inc. won’t be running the show at least until the hundreds of millions in black box finally get distributed, but it’s theoretically possible.

A Page of History

There will be a lot of loose talk about how the MMA created this audit right against DSPs that nobody ever had before. That is sort of true as far as it goes, but it is very common for direct licenses (as opposed to statutory licenses) to have a contractual audit right. See what they did there? 

In the pre-streaming era, audit rights were absolutely common under controlled compositions clauses and under the HFA standard license. In years past, I was asked by government folk a few times about why the publishers turned down a chance to add a stand alone audit right for everyone in amendments to the Copyright Act, which mystified them. I cynically said that it was probably because they wanted to drive business to HFA who did get an audit right in the standard HFA license (which offered contractual quarterly accounting as opposed to statutory monthly accounting in exchange for an audit right).

So just another day in the Title I era, half truths, conflicts and secrecy with full employment for bureaucrats. And the black box keeps ticking over.