By Chris Castle
[T-Editor says: This post first appeared on MusicTechPolicy]
The Dog Who Didn’t Bark On the Mirror
There seems to be some concern about pre-Music Modernization Act confidential lump sum payments of accrued black box monies under direct licenses or settlement agreements. Services are promoting the idea that these payments must be deducted from the cumulative black box payments required for services to get the benefit of the limitation on liability and reach back safe harbor.
That limitation on liability, of course, comes with a condition that the services use “good faith, commercially reasonable efforts” to match works to copyright owners. Uses that remain unmatched are then turned over to the Mechanical Licensing Collective for matching and distribution.
The Digital Music Providers [“DMPs”] are now promoting the payment of black box as an option for which they can elect to take the limitation on liability. The Digital Licensee Coordinator [representing the DMPs] tells us “If the regulations make it less likely that a DMP will be able to rely on that liability protection when it needs it—i.e., if it increases the risk that a court would deem a DMP to not have complied with the requirements in section 115(d)(10)—a DMP could make the rational choice to forego the payment of accrued royalties entirely, and save that money to use in defending itself against any infringement suits.”
The SOCAN company MediaNet tells us that absent some aggressive concessions by the Congress to essentially re-write the Copyright Act in their favor, “MediaNet may decline to take advantage of the limitation on liability, which may deprive copyright owners of additional accrued royalties.”
The DMPs have somehow managed to convince themselves that payments of unallocated sums under settlement agreements (which they weren’t required to match before the MMA) and payments of unallocated sums under the MMA’s black box (which they are required to match under the MMA) are a “double payment.” While easy to say, “double payment” makes it sound like someone paid twice for the same thing. That would be bad if it were true.
But it’s not.
Betting and Strangers
Certain DMPs and certain publishers made settlement agreements of prior unpaid royalties. We don’t know exactly what gave rise to those agreements but we do know that they covered unmatched (and therefore unallocated) black box payments. Because the payments were unmatched, they were necessarily a lump sum payment to the participating publisher (although the amounts may have been reduced by commissions for administering the lump sum distributions under so-far confidential settlements).
At the time of the settlement, nobody did the work to match the unallocated. This is important for at least two reasons: Because the works were not matched, the lump sum couldn’t have been allocated to specific works owned by strangers to the settlement. Therefore there was no initial payment to those strangers, the strangers were not represented in the transaction, the strangers did not authorize the settlement of their claims, and there was no legal basis for the parties to settle ripe but inchoate claims the strangers could have made had they been asked.
The lump sum settlement was evidently based on market share of the then-unallocated black box. Market share payments would be a typical way to avoid doing the work of matching. It’s like a DMP saying to a publisher “I’ll make you a bet—if you have 10% market share of the known knowns, I’ll bet that the most I owe you for then known unknowns is 10% of the cash value of the unallocated black box. Particularly if you are the first payment.”
Why not do the matching at the time? We’ll come back to that.
The settling publisher feels they made a good bet and accepts the terms. The DSP adds one additional post closing condition—the bet must be secret. The settling publisher will likely voluntarily distribute the monies to their own songwriters on a ratio of earnings (similar to market share), so it can’t be entirely secret. And there are no secrets in the music business. But given these realities, why must the bet be secret?
To keep the strangers to the bet in the dark.
If the bet is announced, strangers to the bet may decide they need to look into how much they are owed. They may not be willing to take a bet. They may want what the statute contemplates—good faith commercially reasonable efforts to actually match.
After the DMPs negotiated their safe harbor in the MMA—remembering that the black box payment was never sold to songwriters as optional—it became apparent that all the strangers were now going to be paid for all the uses that were never matched as a part of the lump sum bet. All the DMPs efforts to keep the strangers in the dark were going to be exposed. And exposed all at once. To what end is this secrecy? Probably for the same reason the DMPs have never posted the unmatched (unlike Royalties Reunited or the AFM-SAG/AFTRA Trust Funds.
Who’s At Fault?
The settling publishers have done absolutely nothing wrong here. They could have pressed for matching but chose to take the bet. Could be high, could be low, but seemed like a good bet at the time.
Plus, by making the bet, they did not take anything away from strangers. The DMPs still owed an obligation to the strangers. The settling publishers did not owe the strangers anything.
This is why the bet is not a double payment so long as the settling publishers are not claiming any uses that were released and settled, which they are not as far as we can tell.
If the DMPs made a bad bet, that’s on them.
The DMPs cannot now reduce a cumulative unmatched black box by the prior bets they made. And of course, as transactions are matched, the unknown knowns become known knowns and are paid out. In order to accomplish the purpose of the statute, all the transactions must be reported.
The MMA “deal” was for cumulative payment of the black box. If settling publishers end up having matched works in the black box—when the unknown become known—those per-transaction payments can be offset to the extent they were covered by a prior release agreed to by a bettor.
But what they cannot do is simply say I made a bet with these guys, so I’m going to claw that back from what I owe to other people who are strangers to the bet. That’s not a double payment either to the bettor or the stranger to the bet.
Letter of Misdirection
I also do not understand a conversation about letters of direction in this context. As known unknowns get matched, the DMP should render a statement.
If the known unknown becomes a known known, that statement will reflect at a minimum the title, copyright owner and the usage as well as whatever other metadata the regulations require. The now known knowns will either be payable as matched works or have already been covered by a settlement and release for the corresponding period.
In the former case, the payable royalty will be available. In the latter case, the royalty will have already been paid as part of the settlement. If that settlement royalty is included in the corresponding black box, that settled usage would be deducted as already paid, which would have a corresponding reduction in the total amount of accrued but unpaid royalties. That’s not a letter of direction, that’s an offset against otherwise payable royalties due to matching.
Alternatively, the settling publisher would not be allowed to make a claim for the periods subject to the release because they have no live claims, assuming a total settlement and release for the corresponding accounting period.
Said another way, whatever transactions are in the pending file stay in the pending file with accrued royalties until claimed. Prior settlements can only be deducted from the transaction lines in the pending file that are for songs owned or controlled by publishers that fall under a prior settlement.
Tolling the Statute of Limitations
The way the DMPs have actually harmed the strangers is by keeping quiet on this idea that the reach back safe harbor is optional. They could have raised this issue during the drafting of MMA and after. But they waited until they had scared away anyone except Eight Mile Style from suing while in theory statutes of limitations ran out starting on 1/1/18 at a minimum. They used the MMA as a kind of in terrorem stick.
That is grossly unfair. This has to be changed so that strangers who didn’t make the bet, who didn’t get the payment, and who were silent with their ripe claims since 1/1/18 are not harmed.
It’s all fine for the DLC to say they do a cost benefit analysis and elect not to take the safe harbor while allowing strangers to be duped. They should not be able to fool both Congress and the strangers. Any statute of limitations running since 1/1/18 should be tolled, perhaps under the Copyright Office emergency powers.
Songwriter Black Box Payments
It is rare for a songwriter to have a royalty claim on unallocated catalog-wide payments such as black box monies absent a specific negotiated deal point. This is a point of some contention with songwriters, so the Copyright Office should look into it as part of the black box study if nothing else.
This black box issue that keeps coming up may be many things, but a double payment it’s not.