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Hey Alexa, Where’s My Money? Address Unknown Update Courtesy of Paperchain

July 17, 2017 1 comment

We get an update this week on the total “address unknown” mass NOIs filed with the Copyright Office for the royalty-free windfall loophole.  This time we have to thank our our friends at Paperchain in Sydney for doing the work of decompressing the massive numbers of unsearchable compressed files posted on the Copyright Office website.  As you can see, there’s been an increase of approximately 70% since January 2017.   (For background, see my article.)

As you can see, Amazon is still far and away the leader in this latest loophole designed to stiff songwriters, followed closely by Google.  However, Spotify is moving on up.  Spotify does get extra points for starting late in March 2017, but they are catching up fast filing over 5,000,000 as of last month.

To put this in context–the Copyright Office as recently as September 2015 posted these “address unknown” NOIs in a single searchable PDF.  However, the Copyright Office  apparently changed the practice abruptly in early 2016 once the Big Tech hammer came down.  Based on the last PDF I could find, the total number of “address unknown” NOIs filed with the copyright office from January 2010 to September 2015 was approximately 4,800.

NOI 2015 Era Date Detail

Compare that approximately 4,800 in five years to approximately 45 million in 18 months.

Notable in its absence:  Apple Music has not filed a single address unknown NOI.  Somehow Apple seems satisfied with their licensing practice based on an absence of a single NOI.

NOI Table
Licensee Paperchain 4/16-6/17
Total 45,856,225
Amazon Digital Services 23,977,548
Google, Inc. 10,386,238
Spotify 5,020,002
Microsoft 3,522,100
iHeart Communications 1,565,763
Pandora Media, Inc. 1,316,512
The Overflow.com Inc. 66,326

Big Tech’s Latest Artist Relations Debacle: Mass Filings of NOIs to Avoid Paying Statutory Royalties (Part 2) — Music Tech Solutions

September 30, 2016 Comments off

As noted in Part 1 of this post, Google, Amazon and others are filing what are reportedly “millions” of “address unknown” NOIs with the U.S. Copyright Office to avoid paying royalties on songs like “Fragile (Live” by Sting, even if they have licensed “Fragile” the album versions.  I fully expect that Pandora will eventually do the same for its on-demand service and Spotify is likely to do the same. This type of carpet bombing of NOIs takes the treatment of songwriters by online services to a new low.

via Big Tech’s Latest Artist Relations Debacle: Mass Filings of NOIs to Avoid Paying Statutory Royalties (Part 2) — Music Tech Solutions

Big Tech’s Latest Artist Relations Debacle: Mass Filings of NOIs to Avoid Paying Statutory Royalties (Part 1) — Music Tech Solutions

September 29, 2016 Comments off

Google, Amazon and MRI are reportedly filing “millions” of NOIs with the Copyright Office after buying data out the back door of the Library of Congress–all to avoid paying statutory royalties.  This takes “carpet bombing NOIs” to a whole new level of hurt for songwriters, and forces the Copyright Office to be complicit in the wholesale rip off.

via Big Tech’s Latest Artist Relations Debacle: Mass Filings of NOIs to Avoid Paying Statutory Royalties (Part 1) — Music Tech Solutions

The Voting Dead: White House memo questions if anonymous comments can be used in making policy?

May 25, 2016 Comments off

By Chris Castle

If you followed the Copyright Office request for public comments on the DMCA “notice and takedown” safe harbors, you will probably be aware of reports that a group called Fight for the Future generated 86,000 comments to the Copyright Office in approximately 36 hours.  I will give even money that it will turn out that investigation will reveal that most of those comments were fake.

One reason I’d make that bet is because they look fake.  Many were anonymous or pseudonymous and there’s really no way to know who or what submitted those comments.  And that’s why there’s a question about whether this kind of public comments can be used at all for policy making.

screen-shot-2016-05-12-at-2-58-04-pm

But another reason I’d make the bet is because we’ve seen this kind of thing before–and no one ever checks.

Recall that we were very suspicious of Industry Canada’s use of anonymous public submissions over the Internet in the public “consultation” on copyright reform in Canada held in 2009.  For mysterious reasons, Industry Canada bureaucrats charged with administering the consultation failed to implement even the most rudimentary controls to screen or qualify these anonymous public submissions.

Not only did the Industry Canada bureaucracy fail to implement even rudimentary controls over the public submissions, but they also completely overlooked obvious flaws in the submissions themselves—flaws easily exploited by “a dedicated group of like-minded people.”

Unfortunately, then-Minister of Industry Tony Clement was not given the information he needed to realize that his many public statements about the success of the consultation process will forever have an asterisk by them—“*except for the totally gamed online submissions.”

And then there was an incident in 2007 involving an EFF “petition” against the RIAA.  When you click on a “see signatures” link you are taken to a page full of 5 or 6 digit numbers all in columns and rows. What was this? There were literally a couple hundred number sequences, like little serial numbers, all arranged in neat columns and rows under the heading “Those Who’ve Taken a Stand Against the RIAA!” like you’re at the Tomb of the Unknown or something (no pun intended). It’s like you would have expected to see names, but instead you see numbers. And when you click on the numbers, the links point you back to the same page you were on when you clicked the link.

I tried clicking a few other numbers and the same thing happens. Then I finally happen to hit on one that actually shows a few names, names like “O. Online Poker”, “T. Texas Holdem”, “P. Poker Rooms”, towns like “Google, CA” (must be Stanford?), “Świnoujście, ME”, “f, MA”, “Beverly Hills, LA”, “Beverly Hills, MI”, Dubai, “SCOTLAND!!, AK”, and my personal favorite “J. Travolta, Los Angeles”. And then there’s “r. little boys” of “George, AL“. No comment.

We could take some advice from Google’s own advertising customers about fakery.  Sir Martin Sorrell, the head of the mega-ad agency WPP, says Google won’t even tell WPP or the advertisers themselves.  According to a recent article in the Financial Times, Sir Martin “warned Google that unless it improves its efforts to weed out ‘fake views’ of online adverts, marketers will shift their focus back towards traditional media such as press and television.” Sir Martin was reacting to a study that alleged that Google “has been charging marketers for YouTube ad views even when the video platform’s fraud-detection systems identify that a ‘viewer’ is a robot rather than a human being” and Sir Martin stated the obvious conclusion that “[c]lients are becoming wary and suspicious.”

It’s a short hop from fake views of online adverts to fake anything else, including fake signups to a public consultation on regulations.gov.

A process that allows an organization like Fight for the Future to collect submissions of a form letter and then submit them all at once unnecessarily inserts a gatekeeper into the public comment process.  But it is the kind of thing you would do if you wanted to avoid anyone collecting the address information on your favorite robots.

The anonymous and pseudonymous “signers” of the Fight for the Future form letter are not that different from a casual online poll.  As former Canadian Minister of Industry Clement learned the hard way, online polls or their equivalent do not make for good policy as that system is inherently unreliable.

I’m not the only one who thinks so.  Cass Sunstein, then the Administrator of the Obama Office of Management and Budget, issued a memo in 2010 to the heads of executive branch departments and regulatory agencies which dealt with the use of social media and web-based interactive technologies.  If the Copyright Office followed the memo’s proscriptions, it would likely rule out the use by the Copyright Office of online form letters such as the Fight for the Future webforms.

Specifically, the Sunstein memo warned that “[b]ecause, in general, the results of online rankings, ratings, and tagging (e.g., number of votes or top rank) are not statistically generalizable, they should not be used as the basis for policy or planning.”  Sunstein called for exercising caution with public consultations:

To engage the public, Federal agencies are expanding their use of social media and web- based interactive technologies. For example, agencies are increasingly using web-based technologies, such as blogs, wikis, and social networks, as a means of “publishing” solicitations for public comment and for conducting virtual public meetings.

As one source noted, “[A] million Americans can Digg or retweet [or Reddit] an important blog post, but government officials shouldn’t use that popularity as an indicator of the post’s value. That’s not always a bad thing considering that a dedicated group of like-minded people can game a casual voting system.”  Or the Copyright Office’s public comment process–and it must be said that since Regulations.gov hosted the online comment process, that would rule out any other form letter responses to any consultation for the whole of the federal government as hosted by regulations.gov.

And I think Sir Martin Sorrell would agree that there’s no more dedicated group of likeminded people that a bunch of robots.  So if you didn’t before, you get the idea about why Mr. Sunstein had reservations about using online petitions to make policy.

Mr. Sunstein—who some might call something of an Internet evangelist—is clearly trying to establish best practices for the U.S. government to allow the government to benefit from the good of using the Internet to further legitimate policy making goals while avoiding the bad. Avoiding the bad includes a prohibition on basing policy decisions on the use of information that is or could be gamed in the formation of public policy by “a dedicated group of like-minded people.”  And the gaming can be done before or after the fact, and the “like-minded people” can be outside—or inside—the government.

It is not a very large leap to imagine a truly Orwellian world where the government finds that the public supports its policies because it uses information that its anonymized supporters intentionally game or are encouraged to game to produce the desired result. As we noted in Fair Copyright Canada and 100,000 Voters Who Don’t Exist , the legitimate desire by governments to use the Internet to engage with the governed is to be admired. But if the process is selectively managed by bureaucrats with an agenda or groups like Fight for the Future (funded in part by mega-lobbyists the Consumer Electronics Association), it is to be greeted with considerable caution if not outright suspicion.

FFTF CEA

At least when they count the votes of the dead in Chicago, there was a somewhat real voter registration at some point.

The MTP Interview: Janita and #irespectmusic: Washington from an artist’s perspective

July 1, 2014 1 comment

[This interview first appeared in the June edition of Music Tech Policy Monthly.  Janita’s story was specifically noted by Representative Judy Chu in the House IP Subcommittee.]

The #irespect music team returned to Washington, DC last week for more meetings on Capitol Hill about artist pay for radio play.

We interviewed Janita about the trip and discussions with Members of Congress about the importance of passing legislation to create a performance right in sound recordings on terrestrial broadcast radio.

MTP:  Tell us a little about your creative arc, who are your musical influences, what’s your background and how did you get to where you are today musically speaking?

Janita:  I’ve been an artist for over 20 years; I was originally a child-star in my home country Finland. I have gone through many phases in those years, but the phase that I’m most excited about is the one that I’m going through right now. My musical style these days is a mixture of all of my influences, which include alternative artists like Radiohead and Blonde Redhead, soul artists like Meshell Ndegeocello and Bill Withers, and many artists that I find it harder to categorize like Tom Waits and Crosby, Stills and Nash. I’m an omnivore when it comes to music though. My favorite kind of music is great music.

I took a few detours in my musical career, having started at the tender age of 13. Being so young and pliable I got used to being maneuvered by record label executives and such, without realizing that their will wasn’t actually my will. It took me a long time to wake up, grow up and gather the courage to say: “No, man. I’m gonna do it my way. On my own terms.” Now I write all my own music, I play guitar and piano, and I’m very hands on in terms of production. I’m in charge of my music and my career and I love it! I think that that same defiance informs my current role in #irespectmusic.

nadler

L-R:  Tommy Merrill, Rep. Jerry Nadler, Blake Morgan, Janita

MTP:  What is your perspective on the lack of artist pay for radio play in the US?

Janita:  As a Finnish artist I have always been paid for my performances whenever my music has been played on the radio. I have gotten used to this right, and thus the absence of it is distinctly noticeable. In the beginning of my career I didn’t write my songs, so I relied on my performance royalties for part of my income. I would estimate that at times those royalties have been about a third of my overall income.

It was shocking to me initially, when upon moving to the States I heard that the US doesn’t pay performance royalty at all. But at the time I assumed that Finland was the exception in paying those royalties. It only dawned on me much later that instead the US is the exception in this particular area. Every other democratic country in the world pays this royalty. It’s a right, not a privilege.

MTP:  When you became a US citizen, did you continue to get paid for performances in Finland?

Janita:  I became a US citizen last summer, so this is all quite new. Royalties get paid retroactively, and up until some months ago I was still receiving payments for my performances on the radio from last year. I am lucky in that Finland allows dual citizenship with the US (for example Denmark, Japan and Netherlands don’t), which means that if I register my dual citizenship, I will not lose these royalties. However, if I was to decide to become solely a US citizen (which is what the US would actually prefer), I would lose my performance royalties from all over the world. The reverse of the American Dream! As it is, it doesn’t make sense for any recording artist from any democratic country in the world to become solely a U.S. citizen, for loss of a significant source of income.

marsha blackburn sm

L-R  Janita, Rep. Marsha Blackburn, Blake Morgan, Tommy Merrill

MTP:  How did you get involved with the #irespectmusic campaign?  Were you worried about getting the Lars Ulrich treatment?

Janita:  Blake Morgan is both the owner of, and a labelmate of mine on ECR Music Group. In addition to that he is the producer of my upcoming album. I followed the back and forth communication between Tim Westergren and Blake very closely last year, and I realized then that I could have been totally duped by that misleading IRFA-email that Westergren sent to a multitude of musicians. Learning the facts through Blake’s whistle-blowing roused my anger, and it was then that I realized that I wasn’t as informed as I wanted and needed to be about issues regarding my profession.

As the year went on, I started to get more and more passionate and involved in these issues. I was immediately on board with #irespectmusic when it launched. We as artists deal with so much injustice in the music industry, and often without our knowledge. I think that many of us are under the impression that there no longer is money in the music business, and settle into that reality. The truth is that there are billions of dollars changing hands in the music industry. It’s just that the artists aren’t getting their fair share of the pie. Us artists are making the industry’s only product and we’re not getting paid for it. It’s obvious that this has to change.

Regarding the Lars Ulrich-treatment… I didn’t much consider it. I was righteously, joyously angry and just went with it.

MTP:  You’ve been to Washington twice with Blake and Tommy to talk to Members of Congress and government officials about the #irespectmusic campaign.  What’s that experience been like for you?

Janita:  It’s been a transformative experience. The first time we went I actually felt emotional in the discussions. I realized that I was giving a face, a name and a voice to artists both in the US and abroad. These government officials regularly deal with the CEOs, directors and the lobbyists of large music organizations and companies. My guess is that it’s pretty rare for them to actually meet with middle-class rock stars: the people who are personally and directly affected by this particular legislation. We are the people to whom artists being paid for their performances on the radio means the difference between being able to keep our lights on or not. To me it’s both a responsibility and a privilege to tell my story to these people, now that I have the opportunity. It has been amazing to see how receptive, informed and motivated both the Members of Congress and other government officials have been.

 

copyright office

 Blake, Tommy and Janita with Associate Register of Copyrights

and General Counsel Jacqueline Charlesworth and Copyright Office Staff

 MTP:  Do you find your Washington meetings have been positive and are the government folks interested in what you have to say as an artist?

Janita:  Absolutely.   We have been greeted with much support everywhere we’ve gone so far. Blake Morgan is a brilliant and funny front-man for this campaign, and each meeting has been positive and inspiring.  Also, my story has been particularly interesting to the government folks that we’ve met, because it brings an international perspective to the issue. It’s pretty cool to state your case, when the injustice is so clear that only a fool would argue it. Artists deserve to get paid for their work! This is not a complicated issue in the end. A plumber, a farmer, a doctor and a lawyer get paid for their work. Why are artists expected to work for free? The government people that we have met with have all keenly understood this issue.

MTP: How have other artists you know reacted to the #irespectmusic campaign?  Have fans been supportive?

Janita:  This is #irespectmusic, with an emphasis on the “I.” It’s not about pushing others to act, it’s about personally reacting to the injustice and wanting to join the cause voluntarily. And so many have, which is wonderful. My fans are incredibly supportive, yes.

 

Judy Chu

L-R: Janita, Rep. Judy Chu, Blake Morgan and Tommy Merrill  

MTP:  What do you have planned in the future for #irespectmusic?

Janita:  I wouldn’t be surprised if we ended up going to Washington DC again quite soon. It’s been amazing to watch the momentum grow on the grassroots-level, on the political level and on the music industry side. Of course, right now we are waiting for Rep. Nadler’s upcoming bill, which is thrilling. Exciting plans are in the works!

IRM Team

“Successful” Licensing Models and the Opt Out: Music Licensing Study Comments

June 14, 2014 1 comment

The U.S. Copyright Office is conducting a “Music Licensing Study” as part of the government’s overall review of the U.S. copyright law with an eye to potentially overhauling the entire copyright system.  (See “The Next Great Copyright Act” by Maria Pallante, the head of the U.S. Copyright Office and the nominal go-to person for the U.S. Congress on copyright issues.)  The Copyright Office has received written public comments on questions posed in its Notice of Inquiry and is also holding public Roundtables in Nashville, Los Angeles and New York  (in that order).

The speakers at the Roundtables are by invitation only although the roundtables themselves are open to the public.  We understand that the Roundtable participants will be invited to submit written reply comments at some point after the conclusion of the last Roundtable.  The Nashville Roundtable is over and the Los Angeles Roundtable begins on Monday.

I filed comments with the Copyright Office and this post is the second of a three part post focusing on each of the three points I made in my comments (see Songwriter Liberty and Audit Rights Under Section 115).  This post proposes allowing songwriters to “opt out” of the compulsory mechanical license required under Section 115 of the Copyright Act.  While many are advocating abandoning the compulsory license altogether, I not only don’t think that goal is politically achievable without a consensus among songwriters as well as a very clear understanding of what comes after it, I also don’t think it’s necessary to go that far.

A middle ground is the “opt out,” so that those who wish to take advantage of some or all of the provisions of the compulsory license may do so, while those who want to negotiate a direct deal can reserve those rights to themselves.

One of the questions on the Copyright Office Roundtable Agenda is a discussion of successful licensing models.  I don’t see how anyone can defend the compulsory license in Section 115 as a “successful” model (particularly compared to the very successful compulsory license for sound recordings).  First, I can’t imagine how a licensing process could be “successful” if it does not result in transparency and robust record keeping. As I discussed in the post on creating an audit right, not only does the government not require transparency, the government actually mandates opacity.  I guess the only thing worse than piracy is accuracy.

In current practice, the compulsory license in Section 115 allows users of the license to blast out a paper trail of hundreds of thousands of notices of intent to use.  The practice of of “carpet bombing” NOIs simply results in an argument to insulate users from claims for at least intentional infringement–unless a songwriter can successfully argue the the entire exercise was just a ruse.  That would require a very well-funded songwriter plaintiff.  And no right to audit is just the cherry on top.

As David Lowery noted in his comment to the Copyright Office, the government forces songwriters to continue to license to users who don’t comply with the requirements of the license, may not pay on time, and may not pay correctly, even if the songwriter sends a termination notice and even sues the user.  The government has no feedback loop to determine if users of the license deserve to be able to keep using the government mandated compulsory.  (See Credit Check: Serial Bad Actors Should Lose Access to Compulsory Licenses.)  As David said:

In  an arm’s  length  direct  license,  I  certainly  would  not  choose  to  make a  new  license  for  my  songs  with someone  who  didn’t  respect  my  rights  or  honor  the  terms  of  my  agreement  in  the  past — particularly someone  who  owed  me  money.    Why  should  a  compulsory  license  be any  different?

These problems affect the big guys and the little guys alike–this is why I think it is necessary to allow songwriters (and if songwriters assign the opt out right, their publishers) to opt out of the entire charade.  Some may object to the opt out as making it more complicated for users to operate, but as we have seen with the Amazon service in the last week, it is not necessary for even a major service like Amazon to have deals in place with all publishers, particularly when the service offers onerous and subpar terms.

Here is part 2 of my filing:

2. Opting Out of the Compulsory License Under Section 115

A Nashville hit songwriter and session musician told me long ago that he was mystified. “Why can I get double scale when I play on the hits, but I can’t get double stat when I write the hits?” An excellent question.

Nearly 10 years ago, former Register of Copyright Marybeth Peters told the Congress that abandoning the compulsory may be an idea whose time has come:

[T]oday all…countries, except for the United States and Australia, have eliminated such compulsory licenses from their copyright laws. A fundamental principle of copyright is that the author should have the exclusive right to exploit the market for his work, except where this would conflict with the public interest. A compulsory license limits an author’s bargaining power. It deprives the author of determining with whom and on what terms he wishes to do business. In fact, the Register of Copyrights’ 1961 Report on the General Revision of the U.S. Copyright Law favored elimination of this compulsory license.  I believe that the time has come to again consider whether there is really a need for such a compulsory license. Since most of the world functions without such a license, why should one be needed in the United States?

If the Congress were to abandon the compulsory license, this would potentially derail over 100 years of commerce that relies on that structure. I think that ultimately this is the direction that the Congress should steer. However, short of abandoning the compulsory license altogether there is a middle ground and potential fix that would be relatively easy (emphasis on “relatively”).

Why keep Section 115? Just as we have uniform statutes like the Uniform Partnership Act or Uniform Commercial Code, there is a value to having certain terms of a mechanical license set in the Copyright Act. The standard negotiated mechanical license is a private contract that typically starts with “this license incorporates by reference the mechanical license in the Copyright Act except as set forth herein” or words of similar import.

The problem is not that there is a uniform set of mechanical license terms that copyright licensees and licensors can easily reference. The problem is that the terms are compulsory and essentially deny songwriters the ability to bargain—as my Nashville friend bemoaned. This is especially true of the so-called “minimum” statutory rate. I respectfully suggest that in practice the “minimum” rate is essentially a maximum primarily because the songwriter lacks the ability to opt out and withhold their song from the market. Why would any licensee ever pay more than the “minimum” if they are not compelled to accept a higher rate?

This is yet another problem plaguing songwriters. One fix would be to establish a decision point that would allow songwriters either to opt in to the existing statutory license terms or to opt out of it. My view is that the better route might be to phase in an “opt out” so the newly free market could develop more gradually, and implement the “opt in” a few years after the market got used to the idea of the “opt out.”

Either way, the change would probably best be implemented prospectively–there are a host of statutory licenses in use, either stand alone or private agreements granted by artist-songwriters in record deals that rely on the statutory license. Simply eliminating these existing licenses entirely would likely be extraordinarily disruptive and maintaining an optional “uniform mechanical license” in the Copyright Act seems to make good commercial sense.

How would this “opt out” procedure work as a practical matter? A songwriter could communicate her decision to opt out of the statutory license in the document repository of the Copyright Office.

As you know, the U.S. Copyright Office has a well-developed document repository that has been in place for decades. For a modest fee, anyone can register a document and “to encourage document recordation, the law confers certain legal advantages, including priority between conflicting transfers and “constructive notice”…if certain requirements are met.”

So an “opt out” notice could easily be recorded in the Copyright Office and take advantage of the existing jurisprudence around document recording. The services that often “carpet bomb” notifications of intention to use under Section 115 could just as easily look up the songwriter or work in the Copyright Office recordation database to determine if the particular work is available for compulsory licensing and act accordingly.

The “opt out” notice could be very simple in language and structure and its format could be established by equally simple statutory language. Songwriters could assign these rights to their publishers or administrators.

While the U.S. may eventually abandon compulsory licensing altogether as Register Peters suggested a decade ago, a serviceable repair to the system may be an “opt out” structure. This would allow songwriters who were satisfied with the status quo to continue with the compulsory and those who were not could recover their bargaining rights. In the absence of a recorded “opt out” notice, a service or record company could rely on the compulsory license and rate.

If the goal of the statutory license is to approximate a market rate, an “opt out” system will provide many good data points for a rate setting proceeding.

I respectfully suggest that under this structure, there would not be a gap in rights, songwriters and publishers would be able to bargain freely and the market would produce sufficient information for licensees to know what rights were available and who to pay.

Underreporting and No Accountability: Another Reason Streaming Royalties are So Small

January 30, 2013 2 comments

We’re all mad here…

Alice’s Adventures in Wonderland, by Lewis Carroll

The following are my initial comments to the current proposed rulemaking at the Copyright Office that would, in my view, give digital streaming services a pass on transparency and accountability for their extraordinarily low royalty payments.  The reporting on the ridiculously low royalty payments from services like Spotify assume one key fact that is not in evidence–that the royalty, however low, is calculated correctly.

Given the extraordinary sloppiness in the compulsory licensing system and the prohibition in the Copyright Act against songwriters and artists being able to audit statutory mechanical royalty payments, I have to agree with National Music Publishers Association President and CEO David Israelite (quoted again below): “It’s almost as if you had a tax system where there were no penalties if you didn’t file your taxes.”  First they take away the songwriter’s right to say no, then they don’t let the songwriter audit.

So one reason that songwriter and artist payments from these services are so incredibly low may well be because the services are severely underreporting royalties–and there is virtually no way for creators to know.  In the case of songwriters, they are simply blocked from auditing, which of course creates an incentive for companies like those represented by DiMa (including, of course…Google) to use the statutory license because the way they use it creates as much obfuscation as possible and as little accountability as anyone could imagine.

In fact–if you had designed a system that was intended to create as much underreporting as possible, it is hard to think of a system more calculated to meet that goal than the current one.

If screw ups were Easter eggs, then DiMA would be the Easter Bunny.  Or perhaps the Cheshire Cat.

And the new proposed regulations would actually make the status quo even worse.  It all just gets curiouser and curiouser.

And if you like that, just wait until YouTube starts a subscription service.

 

Submitted Electronically

October 25, 2012

Tanya M. Sandros
Deputy General Counsel
U.S. Copyright Office
101 Independence Ave. S.E.
Washington, D.C. 20559-6000

Re: In the Matter of the Mechanical and Digital Phonorecord Delivery Compulsory License, Proposed Regulations for Reporting Monthly and Annual Statements of Account for the making and distribution of phonorecords, Docket No. 2012-7

 Dear Deputy General Counsel Sandros:

These comments are respectfully submitted in response to the Copyright Office’s Notice of Proposed Rulemaking dated July 27, 2012 and request for written comments on issues regarding proposed regulations for reporting Monthly and Annual Statements of Account for the making and distribution of phonorecords.1

The following comments are summarized after discussing the issues concerned with certain of our clients who are songwriters or that are musical composition copyright owners or administrators.

I will first offer some commentary on the state of the industry regarding compulsory licenses in the online environment, and then offer some suggestions for solving the problem of rendering certified statements of account based on discussions with concerned songwriter, music publisher and administrator clients.  The purpose of my comments is first to emphasize that the absence of an audit right under Section 115 has caused a lack of confidence in  royalty reporting, and then to suggest that the confidence in reporting can be improved significantly by the Copyright Office adopting robust certification regulations.

  1. Interest of the Copyright Owners

(a)     Historical Uses of Section 115: As you are no doubt aware, the compulsory license for non-dramatic musical works available under 17 U.S.C. 1152 was not widely used prior to the advent of the online music business in approximately 2001.  Even today, most record companies either send the publisher an advice letter for artist or producer- written songs subject to a controlled compositions clause or request a mechanical license directly from publishers for “outside” songs.

We have struggled to find one record company that got into business relying solely or even mostly on the Section 115 license.  On the other hand, it is common for digital retailers to assert a right to rely on the Section 115 compulsory license when launching their businesses.  The practical reality is that these digital retailers offering a large number of sound recordings (typically over 10 million) are required to send large numbers of notices under Section 115.

These notices are frequently sent in paper format which makes processing licenses and tracking royalties very difficult even by major publishers. We have been informed that some retailers or their agents offer to streamline this process with electronic statements, but purport to impose click through license terms on the unwary publisher seeking relief from this “paper chase” by enticing the publisher to “log in” to an account system they cannot access without agreeing to additional terms.

It is difficult to quantify the statutory royalties that have never been paid, have never been disclosed, and that cannot be verified. And yet because of the compulsory nature of the Section 115 license, songwriters cannot opt out, and unless they know that their song has been improperly licensed, even have difficulty exercising the limited termination rights available to them under the Copyright Act.

While the Copyright Office is currently proposing regulations applicable to all compulsory licensees, most of the problems with the license that we have experienced in the marketplace relate solely to digital retailers. Of those problems, almost all can be solved by permitting the rights holders to conduct an industry standard royalty compliance examination of digital retailers—a right that is not permitted under the Section 115 regulations as currently drafted.3

Given the seemingly endless delays in resolving these issues, every year that passes makes it more likely that songwriters will not be paid royalties they are owed by digital retailers. In some cases, verification of these royalty payments goes back over 10 years. Companies have come and gone, been acquired or changed their offerings or management.  We have been told that these companies both resist allowing an industry standard compliance examination and refuse to provide certified statements of account, yet continue to rely on the Section 115 license on the flimsy excuse that it is the Copyright Office who is at fault for failing to issue the regulations that are the subject of the instant inquiry.

And yet these same retailers are able to render statements—just not certified statements. I find this Kafka-esque situation to be rather difficult to believe.

(b)     Songwriters’ Expectation of Integrity: The Congress determined that songwriters should be denied the ability to opt out of licensing their songs, and also decided that the government and not the marketplace should determine the price at which songwriters should be compensated for certain exploitations of their works under Section 115.

As one Nashville songwriter put it, “Why does a top session player get double scale, but a top songwriter doesn’t get double statutory?”

A good question.

Section 115’s remedies for non-payment or non-compliance by a compulsory licensee are limited to sending a termination notice—assuming there was even a proper statutory license in the first place that is capable of termination.  If the termination notice is simply ignored, it is then up to the songwriter or music publisher to sue in order to enforce their rights. Very often this puts the songwriter up against very large, well funded, and in some instances litigious public companies who can easily outlast the songwriter in court.4

This stark reality contributes to the ennui of learned helplessness that is all too common when the creative community is confronted with public or venture backed digital retailers who fail to comply with the requirements of Section 115, yet want to continue to use the music.

If the Congress is to force songwriters into this difficult situation by removing their ability to opt out of the Section 115 compulsory license, I respectfully submit that the Copyright Office ought to consider the reasonable expectations of songwriters and music publishers that the system that Congress created have at least as much integrity as the integrity available in the marketplace through a royalty compliance examination of the digital retailers.  The certification requirements of 37 C.F.R. 201.19 are the conceptual analog of the compliance exam, yet there seems to be a breakdown in rendering compliant statements.

In the words of one leading songwriter paraphrasing The Who’s We Won’t Get Fooled Again, “Meet the new boss, worse than the old boss.”5

(c)     Certifications are a Critical Step in a Reliable Compulsory License Regime: Without a reliable certification of accountings in a Section 115 compulsory license regime, songwriters are asked to essentially rely on the kindness of strangers. This was not an acceptable position for songwriters and the marketplace created a solution: royalty compliance examinations under direct licenses. I respectfully submit that the Copyright Office should seek to create in new regulations for Sec. 201.19 at least a comparable level of integrity as songwriters would enjoy with a robust royalty compliance examination.  An effective certification regime would also benefit digital retailers because every day that passes creates an ever more frustrated class of songwriters who one might easily anticipate will eventually seek collective action in the courts.

Historically, direct licenses issued to record companies by songwriters or music publishers typically required a contractual right to conduct a royalty compliance examination of reproductions made by the releasing record company in no small part in exchange for waiving the then-current regulations that would otherwise apply.

For example, a “mechanical license” issued by the Harry Fox Agency (“HFA”) frequently stated that the license issued by HFA on behalf of its publisher principal incorporated by reference the provisions of the Copyright Act under Section 115 except as modified by the HFA license.  One of those modifications was almost invariably that HFA would be entitled to conduct a compliance examination under the mechanical license concerned. This “standard Harry Fox Agency license” became the industry standard, and is referenced just that way in many contracts.

A sensible reason for songwriters or music publishers to waive certain of the Section 115 compulsory license statutory provisions relating to reporting (quarterly instead of

monthly, for example) in exchange for the right to conduct a royalty compliance examination is that the current regulations 6 and especially 201.19 essentially create a moral hazard for the compulsory licensee that the current regulations seek to solve by bringing in a third party certified public accountant.7   In the historical case, a record company relying on a Section 115 compulsory license would have been the only entity in the manufacturing and distribution chain that had the ability to verify whether it complied with the law and rendered accurate Statements of Account 8.

That would mean that the compulsory licensee would be determining what was paid to the copyright owner and the copyright owner would have little recourse to confirm the accuracy of the payment under the Section 115 compulsory license.

It should come as no surprise that Section 115 compulsory licenses were disfavored in the music industry, and songwriters instead opted for robust royalty compliance  examinations conducted by the publisher whose rights were at issue, or by experts on behalf of the publishers such as HFA.

Some examinations were large undertakings, such as those conducted by HFA, and resulted in significant recoveries.9   Examinations are an important part of preserving

integrity in the mechanical license system.  Denying songwriters and publishers an audit right invites corruption–as NMPA President and CEO David Israelite said of the necessity of royalty examinations, “It’s almost as if you had a tax system where there were no penalties if you didn’t file your taxes.”10

All publishers large and small typically have the right to audit record companies to this day under direct mechanical licenses, and no record company would realistically think that it could get away with denying a publisher the right to “audit.”11   In fact, some might even say that by allowing a publisher to cause the record company to open its books, the publisher felt less of a need to conduct an examination since it was able to do so.

Digital retailers should also be subject to these industry standard solutions for verification.

2. Trust But Verify: Digital Retailers Reliance on Section 115

Digital retailers have availed themselves of the Section 115 compulsory license for the so-called “streaming mechanical” for limited downloads and streams.12

Music publishers often find out that the digital retailer is relying on Section 115 for these uses when they receive a notice of the retailer’s intention to use the work under Section 115(b). While I do not have an exact count of how many of these notices (or “NOIs” have been sent to music publishers by digital retailers, we understand anecdotally that there are “tens of thousands,” or “hundreds of thousands,” or “millions” of these notices in the recollections of some of the recipients we spoke to.13

Whichever of these numbers is accurate, the phrase we hear most often to describe this process is “carpet bombing NOIs” which I think conveys the feeling of helplessness on the part of songwriters faced with this onslaught—a burdensome transaction cost frequently not covered by subsequent earnings.14

It should be apparent that the ability to “carpet bomb” notices under Section 115 creates a perverse incentive to send massive quantities of NOIs in hopes of insulating the digital retailer from at least willful infringement claims.

Combining the ability to “carpet bomb” NOIs with an ability to refuse a compliance examination in a legalistic reliance on the current regulations adds injury to insult for songwriters.  In fact, it seems that even the casual observer could conclude that there was a possibility, if not a substantial likelihood, that “carpet bombing NOIs” without a compliance verification process in place could easily result in a significant misallocation of royalty payments required by the Copyright Act.

With the increasing shift from physical to digital sales and with digital retailers relying on the Section 115 license almost exclusively for significant music offerings, the Copyright Office is faced with a situation where what was once a backwater of compulsory licensing of relatively small importance to the survival of music publishers and songwriters is becoming a torrent of mistrust for what holds the promise of being a significant income stream.

3.    Basic Accounting Statements Can Be Rendered Under the Current Regulations

In this section, I will distinguish “accountings”, being noncompliant royalty accountings rendered on an ad hoc basis by digital retailers and “Statements of Account” that compulsory licensees (including digital retailers) are required to render by the current regulations.

A common response from some digital retailers is that they are not able to render certified Statements of Account because the Copyright Office has failed to promulgate new regulations for streaming mechanicals.15   Yet these same retailers are able to render accounting statements (of dubious veracity, but rendered nonetheless), and at least one agent for digital retailers was able to render what purported to be a certified Annual Statement of Account.  So it appears that if there was a will, there was a way to comply with the statutory requirements.

After discussing the issue with clients, one frequently cited source of mistrust is the relatively common practice of half-hearted compliance with the current regulations16 by digital retailers. After “carpet bombing” NOIs, the retailer renders a noncompliant accounting and frequently pays royalties—based on the retailers own accounting systems. The basis for these noncompliant accountings is unclear, but these documents appear to have been created based on the retailer’s own interpretation of the existing regulations or interpretations by third party intermediary accounting services engaged by the retailer.

I am also aware of only one royalty accounting service that has rendered certified Statements of Account, and at that has rendered those certifications for 2011 only.17 Based on our discussions with clients, a common complaint is that the Statements of Account when rendered include earnings for songs they do not own or do not include songs that are top earners that the songwriters expected to be included on statements but are not. This leads to a lack of confidence in any of the retailer’s documents.

A lack of confidence also leads to the perception that the current regulations as drafted permit retailers or their services to render statements of indeterminate veracity and that those statements could have been certified but the noncompliant retailer chose not to certify. It also appears that there are at least theoretically some retailers who may never have rendered a certified statement—not ever. Some of these uncertified statements could apply to exploitations over the last ten years.

For the handful of services that have rendered a certified Statement of Account, the real and apparent mistakes in these statements has lead to the suspicion that whatever certification was performed was insufficient. Such statements do not satisfy the policy behind the regulations—providing creators with confidence that they are being properly accounted to for the Section 115 compulsory license they cannot opt out of.

It also appears that there may well be a meaningful backlog of accrued but unpaid royalties—a “black box”.  Of course, the publishers and songwriters cannot determine whether this backlog of unallocated monies exists because the retailers refuse to permit a compliance examination and the certification process does not seem to be catching these issues.

In fact, there are some songwriters we have spoken to who believe that if one sat down to design a system with the purpose of creating a large pool of unallocated royalties (and therefore unpaid royalties), one would be hard pressed to think of any angles that are not covered in the current state of affairs.

In other words, there is a supportable perception that some digital retailers want all of the benefits of the statutory license, but few of the burdens—especially the burden of paying a “straight count.”  All of this could be solved by requiring digital retailers to submit to the industry standard royalty compliance examination or a right to “audit”.

As the Copyright Office does not indicate that it is able to replace the regulations regarding Section 115 compulsory licenses with an audit right available to all copyright owners large and small, I would respectfully suggest that the Copyright Office should avoid being used as a foil for those who fail to comply with existing regulations on the flimsy excuse that the Copyright Office has not promulgated regulations applicable to accountings.

3.    New Safe Harbor

I will turn now to respectfully submitting some suggestions to the Copyright Office on important but relatively minor repairs to the current regulations.

It appears from the draft regulations that the Copyright Office is considering offering statutory licensees an additional six month period after the proposed regulations become effective 18 in which to render compliant statements. This additional “safe harbor” would mean that starting today there would likely be a minimum period of nine months or longer before publishers could expect to receive the certified statements they are entitled to and which could easily have been previously rendered under the current regulations.

It appears that implementing this “safe harbor” plan will be challenging, and I would respectfully request that the Copyright Office consider the following issues:

(a)     Granting an additional safe harbor rewards the noncompliant retailers and punishes the compliant ones;

(b)     Offer a clear explanation of the effect of the safe harbor on the statute of limitations for infringement;

(c)     Set forth a date certain on which certified Annual Statements of Account must be rendered and for which years;

(d)    Provide a clear explanation of the record keeping requirements for compulsory licensees taking advantage of the safe harbor if they have failed to provide certified Statements of Account going back further than the documentation requirements of the proposed new section 210.18;

(e)     Provide clear guidance to retailers regarding the reporting of any unallocated or unlicensed compositions; and

(f)    Clearly state the applicability to digital retailers of state unclaimed property statutes on accrued but unpaid or unclaimed royalties.

3.    Certification Requirements

While the new “safe harbor” is of concern, by far the most important aspect of the new regulations seems to be the certification process because it is that process that has the hope of instilling confidence in the system, not to mention getting songwriters paid.

Based on the only certified annual statement of account that I have found, it appears that the certified public accounting firm certifying the statement relied on attestation standards that may or may not be applicable to the certifications under the statutory license.  It would be very helpful in any new regulations for the Copyright Office to identify the specific attestation standards that will be acceptable.  Respectfully, it may be simple for a lawyer to write in a reference to third party standards, but the better course would be to review those standards and offer specific guidance on applying the standards rather than letting the moral hazard of royalty payments color that application.19

In addition, I respectfully suggest that the Copyright Office should specify in new regulations that the certified public accountant certifying Annual Statements of Account must perform their certification review in accordance with the attestation standards designated by the Copyright Office.  These standards should be designed to enable the digital retailer or any third party it engages to prepare Annual Statements of Account so that these standards achieve the related control objectives.

Because the attestation standards go to the heart of the transparency that should be the objective of the current and new regulations, any contracts or understandings between the certifying accountant and the compulsory licensee regarding the books and records that are the subject of the examination should be written and should be publicly disclosed.

What we have found is that there is a general—and I believe erroneous–impression that having Annual Statements of Account certified by a CPA means that the actual systems of the licensee have been verified for accuracy, underlying sales reports verified, and that the CPA essentially conducts a royalty compliance examination with the rigor of HFA or an experienced royalty auditor.

Based on what little we have been able to determine about the contracts and understandings under which these certifications have been conducted, it is equally possible that the CPA and the licensee agreed upon what books and records would be “certified” and that the certifying CPA may have done little to verify the accuracy of the books and records upon which the statements were based. It appears that the CPA is simply verifying that 1 plus 1 does in fact equal 2, or close to it.

3.    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.

7.    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; 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.20   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 aide of songwriters.

Thank you for the opportunity to offer these suggestions to the Copyright Office. Sincerely,

Christian L. Castle

1 77 FR 44179 (July 27, 2012) and 77 FR 55783 (September 11, 2012).

2  Herein, the “Section 115 compulsory license” or “compulsory license.”

3  Compare audit rights of sound recording owners for sound recording performance royalties under 17 USC Sec. 114 at 37 C.F.R. 380.6 “Verification of Royalty Payments”.

4  Although not the subject of this inquiry, the Register’s excellent proposal of a “small claims” copyright remedy would be well suited to address these inequities.

5 David Lowery, Meet the New Boss, Worse Than the Old Boss (April 15, 2012) available at http://thetrichordist.wordpress.com/2012/04/15/meet-the-new-boss-worse-than-the-old-boss-full-post/

6  The current regulations set forth at 37 C.F.R. 201.18 and 201.19 are hereinafter referred to collectively as “current regulations” available at http://www.ecfr.gov/cgi-bin/text- idx?c=ecfr&SID=a71104dd9f045002681202f3f302a5d4&rgn=div5&view=text&node=37:1.0.2.6.1&idno= 37#37:1.0.2.6.1.0.197.18

7  The requirement of having a CPA certify annual statements of account was presumably intended to bring an independent review, but the regulations do not require that the CPA be “independent”, meaning that it is

possible that the compulsory licensee could exert undue influence over the certification process.

8  Monthly and Annual Statements of Account under 37 C.F.R. 201.19 are sometimes referred to herein as simply “Statements of Account.”

9 Alfred Pedecine, then Senior Vice President and Chief Financial Officer of HFA, testified in a 2008 matter before the Copyright Royalty Judges that HFA’s royalty compliance examinations recovered $430 million in additional royalty payments from 1990 to 2007 (available at http://www.loc.gov/crb/proceedings/2006-3/copyright-owners/findings-public-final.pdf):

(b) HFA Has Recovered Hundreds of Millions Through Audits

…HFA regularly conducts [Royalty Compliance Examinations or “RCEs”), or audits, of licensees in order to evaluate their compliance with the terms and conditions of mechanical licenses issued by HFA and to assess whether licensees are paying royalties in full…. Alfred Pedecine, Senior Vice President and Chief Financial Officer of HFA, testified that HFA’s RCEs recovered $430 million in additional royalty payments from 1990 to 2007….This amount represents  approximately 6.2% of HFA’s total receipts from licensees for that period….NMPA President and CEO David Israelite testified: “It’s millions upon millions of dollars that we collect through our process and [we are] probably not finding close to everything that we’re owed. It’s almost as if you had a tax system where there were no penalties if you didn’t file your taxes.” Every RCE that HFA has ever conducted has identified underpayments or failures to pay.

10  Id.

“847. HFA’s audits typically identify a number of deficiencies in licensees’ royalty reporting and payment, including deficiencies in accounting, inventory and recordkeeping processes and procedures….In some circumstances, the deficiencies appear to be the result of carelessness, but in other situations, the licensees appear to have willfully neglected to live up to the requirements imposed by the mechanical licenses that they have obtained from HFA or their obligations under the Copyright Act. For example, record companies sometimes simply use the Copyright Owners’ works without obtaining licenses through HFA or directly from the relevant publisher. In other instances, they obtain licenses, but underreport their use of the licensed compositions. In other situations, record companies distribute significant numbers of “promotional” copies of recordings for which they do not pay royalties, even though these units are not exempt from royalty payments under either the relevant mechanical license or the Copyright Act. Another common occurrence is the maintenance of excessive reserves in violation of the regulations found in 37 C.F.R. § 201.19. In addition, audits have uncovered some licensees with unaccounted-for production, which means that the licensee’s records show that the units were manufactured and distributed, but no royalties were reported, paid or accrued.”

11  But see the current YouTube independent publisher license which denies small publishers an audit right. 12 We leave open the question of whether the benefits of Section 115 are even available or ought to be available to digital retailers as a threshold matter.

13  While “millions” of NOIs may sound extreme at first blush, it follows that if a digital retailer licenses millions of sound recordings to launch a service, there could also be millions of NOIs.

14  See, e.g., Will Page and Eric Garland, The Long Tail of P2P, available at http://www.prsformusic.com/creators/news/research/Documents/The%20long%20tail%20of%20P2P%20v9.pdf

15  These regulations would apply to reporting under the rates established by the Final Determination of Rates and Terms of the Copyright Royalty Board, 2006–3 CRB DPRA (74 FR 4510, January 26, 2009, amended 74 FR 6832,February 11, 2009).

16  Available at http://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&SID=a71104dd9f045002681202f3f302a5d4&rgn=div5&view=text&node=37:1.0.2.6.1&idno=

17  As a threshold matter, it is unclear whether the certification itself was in compliance as many if not all the services that were part of the certification do not appear to have complied for prior years and could be subject to termination.

18  See proposed Section 210.27 “Timing of Statements of Account” 77 FR 44197 (July 27, 2012).

19  The CPA certifying the statements is, after all, engaged and paid by the party to whose advantage it is that the statement not be questioned.

20  See Musicians to receive $50 million in royalties, Chicago Tribune, May 5, 2004, available at http://articles.chicagotribune.com/2004-05-05/business/0405050239_1_royalties-gen-eliot-spitzer-emi-group-plc

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