Christian L. Castle, Attorneys -- Austin, Texas

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A Skeptical Look at the Music Modernization Act

[First published in June 2018 in issue 2:2018 of The Works, the Magazine of the British Academy of Songwriters, Composers and Authors at p. 18]

The three-part “Music Modernization Act” (“MMA”) is winding through the U.S. Congress.  If passed, MMA will be the biggest change in U.S. copyright law in 100 years.  But that doesn’t mean it’s good.

Two of the three parts of MMA apply to sound recordings and a third part applies to songs.  (Just to make it extra confusing, the song part was previously introduced as a stand-alone bill under the same title, but has now been superseded by the three-part bill.)  The sound recording parts are well-known ground and either codify current practices or has been thoroughly litigated.  It is the song part that is controversial.

Crucially, the song part of the MMA applies to all songs ever written or that ever will be written that are exploited in the United States—not only US works.  So the scope is global and applies to your current and future catalog.  Unlike many collecting societies, there is no “opt out.”

MMA passed the lower body of the bicameral U.S. legislature and has been introduced in the Senate (the upper body) as of May 10, 2018.  (This roughly corresponds to a first reading in the House of Lords.)  As a tribute to the lobbyists, it must be said that the bill passed the lower body unanimously on a vote of 415-0.  A cynic might say that’s because none of the Big Tech lobbyists opposed it (yet) and no one had read the bill.  

MMA addresses US-centric issues:  Effecting direct payment to producers of royalties for the limited performance right in sound recordings; closing the loophole that digital services leverage to avoid paying those royalties on recordings made prior to February 15, 1972; and creating a new collective for songs called the “Mechanical Licensing Collective” or “MLC”. 

The MLC part is by far the most detailed and controversial part (some 90 pages of text) and is the subject of this post.  In fairness, I am an MLC skeptic based on operational challenges.  There is also a legitimacy issue--by comparison to the many recent hearings, public comments and consultations on other copyright topics, there has been essentially no public input on MLC.  Thus the songwriter groups who were allowed to participate in the drafting bear an ominous burden of responsibility.

So don’t be surprised if you are hearing of the MMA for the first time in this post. 

While there is a broad industry coalition supporting each of the three parts of the MMA, that support is a mile wide and an inch deep.  There is something in it for everyone at the moment—but if support for all three parts waivers as it may yet do in the Senate, the coalition will likely coalesce around their particular issue and who knows what happens then.

What the MLC Does

There is an extraordinary amount of complexity in the MLC legislation. Space prohibits a comprehensive treatment here.  Realize that the statute is just the start—implementing regulations will be promulgated by the Copyright Office if the bill becomes law.  There will likely be a greater opportunity for the world’s songwriters to comment on those regulations than they have had for the statute itself.  One thing is clear—any meaningful changes to the MLC’s operations will require an act of Congress that is unlikely to happen in the best of circumstances.  So this needs to be right.

The MLC law performs two general functions:  It creates a new “reachback” safe harbor protecting certain infringing uses of songs by tech companies such as Spotify as of January 1, 2018 (that’s right—beforethe MMA becomes effective) and also creates a new compulsory mechanical blanket license for songs used in interactive streaming and limited downloads afterMMA becomes effective.  Realize that the bill was initially introduced on December 21, 2017—eleven days before the proposed reachback period commenced.  A public copy of the bill was not available until after the reachback nominally started.  Big Tech’s support of MMA demonstrates the value of their new reachback safe harbor, beyond even the pre-72 loophole they have exploited.

Reachback Safe Harbor

MMA’s reachback safe harbor is earthshattering.  It eliminates the ability of copyright owners—especially small copyright owners--to sue streaming service infringers like Spotify for statutory damages, attorneys’ fees or injunctions if the service takes the blanket license.  Damages are limited to the paltry streaming mechanical royalty only. The reachback bars claims for infringement lawsuits filedafter January 1, 2018 even if the claim arose beforethat date regardless of the statute of limitations.  The reachback also precedes the enactment of the MMA.  

In America, statutory damages and attorneys’ fees are the “big stick” that every copyright owner had enjoyed for over 100 years. That stick has been a major issue for tech companies, their paid academics and nonprofits in every major Internet piracy copyright case.  The reachback is an historic capitulation that expands safe harbors just when the value gap effort was bearing fruit—bizarrely, the new reachback was announced just weeks before CISAC’s own extensive value gap economic study.  

My bet is Big Tech will use this triumphant surrender as precedent against other copyright categories and in other countries and to fight any value gap legislation.  The reachback has been criticized as unconstitutional by leading copyright lawyers and will almost certainly be challenged. That challenge will no doubt come from a copyright owner who is not an MLC board member, however.

You will note that none of the messaging about the bill addresses the reachback—but it is whyWixen Music Publishing sued Spotifyon December 29, 2017.  As Robert Levine noted in Billboard, “A bill that restricts lawsuits after January 1, 2018 should not have been introduced just before Christmas….”

If MMA becomes law, suits like the Spotify class actions are gone which appears to be the plan.  There arguably is little in the MLC part incentivizing services to report more accurately and they control the MLC’s budget, so it is unlikely that surrender accomplished anything.

Mechanical Licensing Collective

The MLC part of MMA establishes a new bureaucracy for a new blanket mechanical license.  I will discuss a handful of operational issues, but first understand this:  ASCAP and BMI already license the performance right for the same songs, to the same services, for the same performances under antitrust supervision of the government. The MLC will license the corresponding “streaming mechanical” for the same work but gets an antitrust exemption.

You might say, why aren’t the PROs doing a one-stop license for all rights?  The government prohibits at least ASCAP doing so under the 77 year old consent decree.  So the MLC gets an antitrust exemption on streaming mechanicals, but ASCAP (and essentially BMI) operate under government supervision for the same song, transaction and service.

This is even more Kafka-esque because the new head of the government antitrust division has expressly saidthat he wants to review the ASCAP and BMI consent decrees and possibly end them.  The only two concessions that ASCAP and BMI get in MMA are related to these consent decrees—if terminated, they will have gotten nothing.  Shouldn’t we at least find out if the consent decrees end beforebetting the farm on the government mandating a global rights database--that previously failed in the private market? 

Designation of MLC:  The head of the U.S. Copyright Office (called the “Register”) designates the non-profit corporation to be the MLC—but—the Register is limited in that selection to a nonprofit created by copyright owners, that “is endorsed by and enjoys substantial support from musical work copyright owners that together represent the greatest percentage of the licensor market for uses of such works in covered activities,as measured over the preceding 3 full calendar years”; can demonstrate to the Register that is has the ability to do the work.  Because the Copyright Office knows state of the art technology, right?  You see where this is going.

MLC Business Plan and Budget:  None announced for a millennial change in the law. Remember—MMA passed unanimously in the House and no one brought this up.

Funding of MLC Operating Costs: Paid by participating services through an assessment by the Copyright Royalty Judges (“CRJs”).  Unclear what qualifications the CRJs have to evaluate technology startups, or what happens if a digital service goes bankrupt (currently iHeart Media is in bankruptcy) and cannot pay its assessment (but probably will be made up from the black box).  

Digital Licensee Coordinator:  Little discussed is the effect on startups of the MLC assessment structure and control of the services side of the MLC by the biggest corporations in commercial history (Amazon, Apple, Google/YouTube) and the dominant streaming service Spotify.  What if startups cannot afford their assessment?  Are they denied the blanket?

Rate Standard/Ice in Winter:  A new government rate standard will supposedly result in higher royalties for songwriters (misleadingly called “willing buyer/willing seller”--there’s been no free market in 100 years).  Services can request that the CRJs give a reduction in royalty rates based on the CRJs’ assessment of the operating costs for the MLC.

Overbudget:  Board can pay overbudget with black box money with no liability for board absent gross negligence.  Amounts deducted may be replenished in future assessments, but may not be.  No protection if not replenished.

Black Box:  Unclaimed royalties are held for three years and then allocated based on market share (subject to permitted deductions).  This is a major bone of contention.

Governance:  14 voting member board of directors, 10 publishers and 4 “professional songwriters.” Other inferior boards, e.g., for dispute resolution, have more songwriters.  The European Songwriter & Composers Alliance has criticized the structureas out of step with industry practice of at least equal representation of songwriters.

Nonvoting Board Members:  Lobbyists for the publishers, songwriters and digital services appear to have nonvoting board memberships.  Note that this means that the digital services representative (the “digital licensee coordinator”) will likely have a right to information and to attend board meetings.  This may have an effect on attorney-client information, litigation or royalty setting strategy.  There is no prohibition on fees paid to lobbyists.

Global Rights Database:  A new “GRD” to be created by MLC, probably subcontracted. Candidates: Harry Fox Agency, BMI, SOCAN, CMRRA/SX Works.

Claiming/Registration: Unclear how song metadata get into the new GRD, but apparently through an undefined claiming process that suggests some form of registration or other formality, at least with the MLC if not with the Copyright Office.  Even if MLC doesn’t charge, there will still be a transaction cost on copyright owners.

Unfunded Mandates:  Apparently all songwriters bear their cost of registering their works with the MLC, with no compensation to songwriters for complying with this mandate.  Royalties for valid compulsory licenses already in effect (such as the millions of notices sent by MRI, the Harry Fox Agency, MediaNet and others) are to be sent to the MLC after the “license availability date”.  Unregistered songwriter royalties presumably are black boxed.

Voluntary Licenses:  Services and copyright owners may enter voluntary licenses outside of the MLC (voluntary license payments likely won’t get black boxed).  These voluntary licenses presumably include catalog licenses as well as modified compulsory licenses (such as the typical HFA license) whenever made.  Voluntary licenses suggest that the MLC will only administer songs that are subject to the blanket.  However, since there is no opt out, services could refuse to renew a catalog license and then take that catalog under the blanket without paying a minimum guarantee.  Eliminating statutory damages, attorneys’ fees and minimum guarantees would be the trifecta for services.

Accountings:  Payment obligations of digital services are clearly spelled out more or less consistent with current practice, but payment obligations of MLC to copyright owners are unclear, other than black box.

Audits:  Only the MLC may audit the services that pay its bills.  Copyright owners may audit the MLC only.  However, audits must be conducted by certified public accountants and those auditors are obligated to look for overpayments—which probably violates their duty of loyalty.  As Warner Music Group’s Ron Wilcox testified to the CRJs, “Because royalty audits require extensive technical and industry-specific expertise, in WMG’s experience a CPA certification is not generally a requirement for conducting such audits. To my knowledge, some of the most experienced and knowledgeable royalty auditors in the music industry are not CPAs.” Requiring CPAs definitely raises the cost of audit on copyright owners, and demand of overpayment reimbursement definitely adds a touch of in terrorem.

In summary, the blanket license solves some market problems, but the MLC may create more.  The MLC law has been resoundingly criticized as unconstitutional by the top copyright litigators (particularly the reachback safe harbor) and as unfair by many songwriter groups.  At a minimum it’s a major capitulation.

However, I would count on it becoming law.   


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