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Should the Copyright Office’s Best Practices Shine Sunlight on the Unmatched?

November 5, 2019 Comments off

[This post first appeared in the MusicTechPolicy Monthly newsletter.  Become an email follower of this blog to get your copy.]

The Music Modernization Act is a litigation magnet because of its failure to mandate a wholistic solution to the controversial black box. There are two commercially available systems that can address the problem.

We’ve all heard that the digital music services are sitting on a pile of cash in unmatched statutory mechanical royalties also known as the “black box”.  No one knows how much because Title I of the Music Modernization Act does not require them to disclose the unmatched sums being held as of the enactment date (October 11, 2018–a year ago), much less a bring down of the current amount.  And unsurprisingly, no service has voluntarily disclosed how much they are holding.

One may ask, why can’t you just look up on the financial statements of at least the public companies how much they are accruing for their share of the black box?  Good luck with that.

The monies owed to the unmatched “known unknowns” is probably the number one question the services don’t ask their third party reporting agents.  And because of the well known agency principle that “notice of a fact that an agent knows or has reason to know is imputed to the principal if knowledge of the fact is material to the agent’s duties to the principal,” these services likely know as a matter of law how much is in their principals’ respective black boxes or at least what they couldn’t match.  (Restatement (Third) of Agency Sec. 5.03.)

Fortunately, the Copyright Office is tasked with establishing best practices for distributing these unmatched black box monies through regulations to implement these and other provisions of the Music Modernization Act, such as the late fee for non-compliant services.

The Copyright Office has also announced the “kick off” of its study of unclaimed royalties study to be held in Washington, DC on December 6.  This will be great for Washington area songwriters, as well as convenient for the lobbyists and lawyers, but everyone else will have to wait for the transcript and video which unfortunately (and perhaps incredibly) will not be live streamed.  Even so, these pending regulations and the upcoming mandated study on matching are the best chance songwriters have had for a generation to get a straight count on unmatched mechanicals.

There are two currently existing standards that the Copyright Office can reference for examples of industry best practices-the SoundExchange unclaimed royalty search for new members and the Lowery-Ferrick Spotify class action Songclaims portal powered by Crunch Digital.  It seems inescapable that these claiming standards should be guideposts for both the Copyright Office and the Copyright Royalty Judges.

Having such clear cut standards–already operational so not theoretical–is fortunate because it seems obvious that the Congress is both concerned with the black box distributions not being gamed and also intends to exercise its statutory authority to retain oversight over the Mechanical Licensing Collective’s operations.  In fact, Senator Grassley specifically stated in his questions for the record following the Copyright Office oversight hearing that:

The success of the Music Modernization Act (MMA) will depend, to a large extent, on the effective and efficient operation of the Mechanical Licensing Collective (MLC). The MMA included provisions to ensure that there was robust ongoing oversight of the MLC by both the Copyright Office and Congress, and that the new MLC would be accountable to the stakeholders.”

This is in addition to the oversight role of the Copyright Royalty Judges with respect to the Administrative Assessment and at least budgetary aspects of the MLC’s operations that inevitably will turn the quantitative into the qualitative.

During her July 30 testimony at the Copyright Office oversight hearing of the House of Representatives Committee on the Judiciary, Register of Copyrights Karyn Temple was peppered with questions about the black box from Members of the Committee, including Representatives Ted Deutch, Sheila Jackson-Lee and Chairman Jerry Nadler.

These months after the hearing, the gravamen of the Committee’s questions were crystalized in yet another copyright infringement suit brought against Spotify, this time by Eminem’s publishers.  The key theory of the suit is that Spotify is out of compliance with the conditions for the new safe harbor for copyright infringers that is one of the central themes of the MMA.  The Copyright Office can use the complaint as another guidepost for best practices to be compassed by their new regulations.

As drafted, Title I is an invitation for litigation, so it should be no surprise that the independent publishing community stepped forward to sue as that was the only way to find out what was going on behind the curtain.  However, as Senator Grassley emphasized, Congress charged the Copyright Office to establish regulations to implement Title I and gave the Copyright Royalty Judges a defacto oversight role through their approval of the MLC’s budget.

  1. Copyright Office Regulations

The Copyright Office is in the process of drafting regulations for a number of areas in Title I.  The Copyright Office therefore is in a unique position to avoid a maelstrom of litigation by adopting regulations that shine light on the unmatched, recognize industry practices by SoundExchange and Crunch Digital, and accomplish simple goals.  This is not hard.

Regulations should require iterative public disclosure to accompany the iterative matching  required by Title I.  Remember-many of these services are the biggest, smartest and richest companies in the history of commerce.  They know something about these systems as they all have to one degree or another developed significant in-house expertise.

However, it is crucial to have the unmatched actually administered by an unrelated and trusted infomediary.  This could be done by repurposing existing searchable databases for unclaimed funds while simultaneously disclosing to the public the amounts owed for each song.

Balance the Checkbook:  Immediate Public Release of Trial Balance and Monthly Updates of Unmatched

Each service currently participating in the Initial Administrative Assessment proceeding before the Copyright Royalty Judges should disclose an aggregate trial balance of the total sums they are holding in their respective unmatched accounts.  This total number should be made public as well as the methodology used to calculate it.  Nothing should or needs to be redacted.

The services should update that initial disclosure on a monthly basis.  The monthly calculation should show the month’s starting balance of unmatched royalties, how much was paid out during the month, how much was added during the month, and the remaining balance at the end of the month.  This simple calculation would allow songwriters to know what monies were being held with no intermediaries.  It’s as simple as balancing a checkbook.

Unmatched Lookup

If the services know the total sums, they should also be able to disclose the sound recording titles at least, if not the artist names, ISRCs, other metadata for the recordings of the songs that comprise the totals.  These services should be able to provide a simple web-based look-up so that songwriters could know if their songs are included in a service’s unmatched accrual.

Cost Reimbursement

It is becoming increasingly obvious to independent publishers that there will be significant resources and costs required to deliver their data to the MLC and claim their unmatched.   Those transaction costs of delivering data to the MLC-without which the imagined global rights database would not be functional enough to distribute the black box effectively-are incremental to publishers who have been doing business prior to the MMA and the MLC.

These incremental costs are easily identifiable and should be invoiced to the MLC by rights owners to be included in the next administrative assessment and reimbursed by the services.

Future Licensees

Any future licensee (blanket or nonblanket) should also be required to comply with these obligations and disclosures.

2.  Role of the Copyright Royalty Judges

The Copyright Royalty Judges are currently conducting a proceeding to establish the initial “administrative assessment” for the MLC.  The rules of the proceeding require the MLC and the Digital Licensee Coordinator to attempt to reach a voluntary agreement on the amount of the assessment.  If they fail, the CRJs will determine it for them.  The voluntary negotiation is divided into two periods: July 8 to September 6, and then September 7 to January 28.

The parties have failed to reach an agreement in the first period already, so a very basic assessment of probabilities means there’s less than a 50% chance they will agree during the second period.  If they fail to reach an agreement by February 17th, the CRJs will commence a hearing to reach the decision for them.  (One could argue that the likelihood of a voluntary agreement increases with the passing of time, but that doesn’t seem to be the case at this point-it seems to be going the opposite direction.)

Remember-the MLC is supposed to have their imagined global rights database up and running and be fully operational and able to render statements shortly after January 1, 2021, or a little over 14 months from now.  At this point, it seems that there is a greater than 50% probability that Congress will have to amend the MMA to extend the deadline.  Presumably something has happened in the last year to advance the ball.

Crucially, there is an inextricable link between the amount of the administrative assessment and what the MLC intends to do with the money.  Two of those functions will be (1) the MLC’s own efforts at matching whatever is unmatched when the Digital Licensee Coordinator delivers the unmatched accounts (and presumably transaction logs) from the services to the MLC after January 1, 2021, and (2) ingesting data for the imagined global rights database.

Unmatched Best Practices and Disclosures

The CRJs should take a very close look at both the startup and the operating budget for the MLC as well as the underlying assumptions, processes and vendors for those functions to take on the U.S. accounting burden for the entire world.  It should be obvious that the services have a great deal of experience in licensing copyrights and operating royalty systems.

The CRJs should also consider whether they have the authority to address the nexus between the best practices to be adopted by those seeking to rely on the retroactive safe harbor, payments of the newly matched prior to 1/1/21 and public reporting of both accrued unmatched royalties and claiming before and after 1/1/21.  I think they do and they probably have an obligation to do so that is at least as great as the obligation on the Copyright Office.<

Sufficiency of Funding and Sufficiency of Allocation

As Senator Grassley has asked, the CRJs need to address what happens if the process fails to hit the deadlines as part of their determination of the administrative assessment.  Each passing day makes it more likely that the entire procedure will grind to a halt before statements can be rendered.

This concerns both the DLC funding the MLC sufficiently, but it also depends on the MLC allocating those sums appropriately across its operations–and the quantitative implies the qualitative.  Moreover, the CRJs need to fashion a procedure for relief that can be taken up inexpensively by any copyright owner that has a good faith belief they have simply not been accounted to. An example would be someone who was being paid under a statutory license (NOI or modified compulsory) prior to January 1, 2021 whose statements then drop to zero thereafter or who simply receive no statements at all.

While the Register said in response to Rep. Deutch during the Copyright Office oversight hearing that both MLC and AMLC had agreed with the Copyright Office interpretation that unclaimed funds are not to be distributed before 2023, the MLC’s actual statement on the issue is more nuanced.  The judges need to take this into account and leave nothing to the imagination in their determination.

3.  Sunlight is the Best Disinfectant

As Mr. Justice Brandeis taught us in Other People’s Money-And How Bankers Use It,“sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”

Songwriters are in need of both.

Black Box Invasion! Duties of Collective’s Board Under Music Modernization Act

February 17, 2018 1 comment

One of the most unusual aspects of the non-profit collective to be established under the Music Modernization Act is the method of codifying the number of seats on the board of directors (and a couple other boards) and designating the characteristics of the kind of person who gets to hold those seats.  (Of course, it must be said that if there is any language in the bill that actually says who gets to appoint members of the collective’s board of directors in the first place, how long they can serve and how they can be voted off, I can’t find it.)

As the implications of the collective’s Congressionally mandated board composition starts to be understood by songwriters and publishers it is increasingly viewed a highly unusual–and, frankly, extremely patriarchal and expansionist–role for the federal government.  The composition of an organization’s board is something that is always handled in the organization’s by-laws.  By-laws are rules enacted by at least the board of directors of a private company for its own government and are sometimes thought of as a contract between the board and the shareholders, or in this case the governing (the board) and the governed (everyone who has ever written a song and everyone who will ever write a song in the future).  (Some nonprofits may appoint a by-law committee that then reports to the board on recommendations to amend the by-laws, then voted on by the board of directors.)

What is interesting about the MMA board of directors from a process point of view is that because the number of directors and committee structure are fixed by statute, changing the composition of the collective’s governance will probably require an act of Congress.  Which is like saying this may never change and the initial board members are appointed for life and maybe the afterlife.

Of course, the collective is to be a nonprofit corporation.  That means that the nonprofit corporation itself will have to incorporate somewhere in some state, often Delaware, which will have its own rules on by-laws and that pesky voting stuff that the MMA does away with.  It appears that the MMA will immediately cause the collective to come into conflict with state corporate law.

Since the MMA is the greatest expansion of federal power into the lives of songwriters in the history of the United States (a fact not lost on our opponents in the copyleft who might like to get some, too), I would imagine that the response will be the usual don’t worry, be happy.   Federal preemption will fix everything and simply override state law by fiat.  Because they’re from Washington and they’re here to help.  In case you haven’t noticed, not all states are huge fans of this kind of thing.  I live in one such state.

But then I’m just a country lawyer and I’m not as smart as these city fellers.  I’m sure they have it all figured out.

One thing I fully expect to start hearing as the response to the many, many holes in the MMA is not to let the perfect be the enemy of the good enough and that regulations will fix it all.  I have actually heard this said.

That’s right–regulations–as in more regulations.  And if all corporate formation and governance issues are to be handled by regulations, that’s one pile of regulations.  All of which are likely subject to discovery under the Freedom of Information Act, including all board minutes, correspondence, agendas, votes, transcripts, etc.

And then let’s not forget that the MMA has to get signed into law by a President who is making it his business to cut regulations.  Radically.  Whether you like him or not, whether you are a populist or a resister, it is an obvious fact that cutting regulations was definitely a part of the Trump platform and it is definitely something he is doing every day.  So think about how that‘s going to go over.

Back to ignoring reality.  First of all, more regulations require a rulemaking, probably by the Copyright Office.  Ever notice how long it takes for rulemakings to get finalized?  Public comments, etc.?  Is the Copyright Office really up for handling the governance structure of the collective?  Is the collective a government agency which would require rulemakings and regulations to operate or is it a private nonprofit that handles its own rules through the same process that have served organization well in America for a couple hundred years.  You know, that pesky voting thing without the feds looking over your shoulder.

One more thing–remember that the MMA has this clause (aka the “Black Box Invasion”):

INTERIM APPLICATION OF ACCRUED ROYALTIES.—In the event that the administrative assessment, together with any funding from voluntary contributions as provided in subparagraphs (A) and (B), is inadequate to cover current total costs of the mechanical licensing collective, the collective, with approval of its board of directors [unanimous?  simple majority?], may apply unclaimed accrued royalties on an interim basis to defray such costs, subject to future reimbursement of such royalties from future collections of the assessment [to be paid by digital music services after a final, nonapealable judgment].

That’s right–“they” intend for the government to fund the collective’s overbudget out of the black box.  (We can’t know who “they” are because the MMA does not say.)  Well, at least this time they’re honest about it.

And what is the most likely common characteristic of anyone whose money is in the black box?  Songwriters with no direct deal with the services aka the little people in the majority of songwriters.

Remember–the collective has no business plan and no budget.  Yet the board is at least permitted if not required by law to use unmatched money they hold in trust to pay overbudget–for which there is no approved budget so could literally be someone’s cigar bill, legal fees, who knows what.

Note the “subject to future reimbursement of such royalties from future collections of the assessment”.  What if the judges don’t agree to the assessment or that the Digital Media Association appeals every ruling for years which I fully expect them to do because they don’t care about songwriters.  And if you think that’s extreme, name five things quickly that they’ve ever done that would make you think otherwise?

Remember–it’s not their money.  It’s not the government’s money either.  This is why all the black box needs to put in a true escrow account held by an independent third party or escheated to the state like your utility deposit you forgot to collect.  If it’s good enough for your electric bill, shouldn’t it be good enough for your royalties?

The board will be acting as a trustee for that black box money.  Trustees don’t get to make themselves or their companies loans from the money they hold in trust.

Remember–songwriters have been suing to find a fiduciary duty owed to them from their publishers under their publishing contracts for a long time.  It may not be under their publishing contracts, but the MMA hands songwriters that fiduciary duty on a silver platter with the black box invasion.

Board members–serve at your peril.

 

 

 

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