Guest Post: MLC Black Box Invasion: Transparency for the “Interim Application of Accrued Royalties”

This post is a version of Chris Castle’s comment in the current Copyright Office rulemaking on the transparency of the MLC

By Chris Castle

Just when you think you understand Title I of the Music Modernization Act, another toad runs out from under a rock.  My nickname for the toad we’re going to talk about today is the “Hoffa Clause,” in honor of the Teamster leader and well-known pension fund raider (played by Al Pacino in The Irishman).

Here it is:

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 collective total costs, the collective, with approval of its board of directors, 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.[1]

The Office has a serious public education issue about the hygienically titled “Interim Application” clause.  I have yet to meet a songwriter who is aware of this clause in Title I and it was never publicized in the run up to passing MMA. Many publishers have been so taken aback[2] that they deny the clause is there.  Despite the provision’s rather metaphysical properties, it is there and it says what it says.  How it came to be there is only known to the insiders.  But it’s very specific, so must have been placed there for a reason.

Title I gives The MLC tremendous power over affording itself the benefit of administering other people’s money.[5]  The plain language of this clause essentially says that The MLC can invade the black box and make interest free, nonrecourse loans to itself to apply against certain shortfalls in “collective total costs” when the administrative assessment approved by the Copyright Royalty Judges is “inadequate to cover total collective costs.” Under Title I as drafted, The MLC is solely in a position to control that shortfall and to invade the black box.

Anytime anointed people handle other people’s money, stringent rules apply to that duty.  Or ought to.  Strangely enough, this “Interim Application” provision is not addressed at all in the legislative history or the Conference Report.   So we can only look at the words and try to divine the intention of the lobbyists who wrote the bill.

Plain Meaning

The new rule announces itself as relating to the “application” of “accrued royalties” on an “interim” basis.  The Cambridge Dictionary tells us that “interim” means temporary, such as a temporary solution:  “temporary and intended to be used or accepted until something permanent exists”.  That “something permanent” is the “administrative assessment”–which of course will already exist at the moment of “application”.  So there is a chicken and egg issue with this entire concept from the beginning.

(Remember that the “administrative assessment” is the operating budget and startup costs paid for by the users of the Title I blanket license who may also be the beneficiaries of the Title I safe harbor.  The administrative assessment always exists once it has been set in motion by the Copyright Royalty Judges, which is now in place for the foreseeable future.  The CRJs essentially recently rubber stamped the agreement between The MLC (the biggest publishers, having single-mindedly gotten rid of the independents through legal maneuvering) and the DLC (i.e., the biggest services).)

So what money is available to be tapped through this “interim application”?  “Unclaimed accrued royalties”, which sounds like the black box.  Which is why I call it a “black box invasion.”

It is worth noting that Title I uses the terms “unmatched” and “unclaimed” somewhat interchangeably.  I would point out that it is possible for royalties to be both matched and unclaimed, matched and disputed and unilaterally held by The MLC, as well as unmatched and therefore unclaimed. And remember that just because money is unclaimed does not mean that there was any method in place for it to be claimed.

Realize that the entire Hoffa clause is based on an assumption–that there was a meaningful process in place for songwriters (1) to know that The MLC had decided that their money should be held as accrued but unclaimed and (2) to claim their money.  There is neither present today and there is unlikely to be either available any time soon based on public statements of executives of The MLC.  Without both these processes in place, it seems that it should be important, if not crucial, to preserve the status quo until they are and that the public interest would be served by doing so.

Holding Periods Maketh the Black Box

I suggest that the common interpretation of black box is that it includes a series of royalty payments that may be disputed, matched, unmatched and unclaimed and has been so for a holding period of at least a few years, in this case three years.[3]  That suggests that no invasion may occur under this clause before the passing of three years, and the holding period should run on an item-by-item contributory share basis for each rolling accrual.

But that isn’t really the whole story on the holding periods in the first black box distribution from the DLC to The MLC.  The first distribution is going to be all the black box money ever held by all the DLC members (and any other users of the blanket).  Because the security surrounding this amount is tighter than the nuclear football, it is impossible to say how much will be in the black box.  The Songwriters Guild and Society of Composers and Lyricists (the ones who were maneuvered out of the assessment hearing) have been asking this question for months and no one has responded.

The relevant holding period for the black box is not only the three years that The MLC can hold the money, but the entire holding period from when the black box first “accrued”.  That could be many years longer than the Title I holding period.  There’s a question as to the three-year rule should apply or whether the DLC should be allowed to ignore all those holding periods on top of the three years.  You can see this is a story for another post, but keep that in mind for this post.  I don’t think that sentient beings with the ability to think sequentially can just accept that the relevant holding period is three years–after the black box is transferred to The MLC as though the money had been there all the time.  I don’t think songwriters need a court to tell them that’s just wrong.

What Does Accrued but Unclaimed Even Mean?

The fact that royalties are “accrued but unclaimed” for all or part of a song does not tell the whole story, because “unclaimed” standing alone doesn’t tell the whole story.  The “Interim Application” clause applies to “unclaimed accrued royalties” which could be royalties payable for unmatched contributory shares of songs that The MLC doesn’t know who to pay (therefore unclaimed) as well as matched royalties that have yet to be claimed but for which a payee might be identified with subsequent research.

Which contributory shares of a song that are or are not claimed is a fact determined by a snapshot in a moment of time that could easily change in the next moment.  In fact, accrued royalties being held on disputed songs may also find their way into the black box.[4]  Unfortunately, Title I has yet another drafting glitch because it does not identify that moment in time for purposes of the black box invasion.

Borrowing from Frankie to Pay Big Paulie

There could easily be a situation where the black box is invaded but the future assessment is not made for a year or more, or the future assessment is insufficient to repay Peter for the loan to Paul.  Because an expenditure may be an item of “collective total cost” but may not be reimbursed by “future collections of the assessment” rather than the next collection of the assessment occurring after the interest-free nonrecourse black box invasion, the statutory drafting is glitchy.

Plus, while the CRJs approve the administrative assessments, they have no direct approval right over a black box invasion—although approval over one does imply approval over both to the extent the invasion takes money from an assessment in a proceeding before the CRJs (which would be all assessments).  I’ve almost talked myself into believing that the CRJs actually were intended to approve any black box invasions, at least to the extent the sums are to be included in future assessments or offset prior assessments.  I think we all would be grateful if the Copyright Office could clarify this point.

In any event, it is clear that The MLC is allowed to write itself what amount to limitless[6] interest-free nonrecourse loans against the black box that can only be repaid from the assessment if the DLC approves (or perhaps the CRJs could be persuaded to approve).

The DLC would then be put in a position of declining to approve an increase to cover a black box invasion in the assessment that the DLC had nothing to do with incurring and will not have been informed of based on the plain language of Title I.  Since the current assessment seems to be on a fixed trajectory based on the last assessment settlement, it is likely that any invasion amount might exceed the stipulated assessment.  What happens if the assessment is not available to repay the invasion amount is unclear, even though The MLC is allowed to make the decision before knowing how the loan will be treated?

Required Transparency

The first issue in this cluster must be transparency on the board vote at a minimum.  Because the statute refers to approval by The MLC’s  “board of directors” and because the nonvoting members are part of the board, I have always assumed that such a board vote requires both voting board members and at least the assent of nonvoting members.  Neither does the glitchy language require any particular majority, so the new regulations may be an opportunity for the Copyright Office to require a majority, supermajority or unanimous board vote in regulations.

My preference would be for unanimous because I think taking other people’s money is a controversial act and they should lock arms and all go together.  Unanimity would also require both publishers and songwriters to vote for the loan (as publishers already have a supermajority representation written into the law).  As far as I can tell, we can only go by the plain language of the statute as I have found no legislative history on this provision.

Notice to Songwriters

I also think that regulations should provide that there be some written public statement by The MLC’s chief financial officer to the Copyright Office (or the CRJs) that these funds are being approved by the board for disbursement before the taking.  The CFO should also provide a justification statement.  The MLC board should have to sign up to that statement with full transparency of (1) why there is this compelling need and (2) why that need can only be met this way.  Frankly, it would be best if the funds could not be disbursed until the Register or the Librarian approved the disbursement in all respects.  One would think that the board members would want this sharing of responsibility.

Another option, if possible, would be to require The MLC and the DLC to return to the CRJs and request an increase in the applicable assessment or amendment to The MLC’s budget to cover the black box invasion.

What’s in Your Wallet?  Explain Why There is a Shortfall

There yet another drafting glitch in this section.  The statute fails to ask why a quango like The MLC is in a position that the millions in the Administrative Assessment doesn’t cover the relevant costs in the first place.  The assumption seems to be that there was a spike in the defined “collective total costs”.  As The MLC is in control of how the Administrative Assessment is spent, there may need to be some true up between the authorized budget approved by the CRJs and what was actual spent on a line item basis.

This raises, of course, the question of what kind of items should never be covered by the Administrative Assessment (which, if violated, could cause a shortfall requiring the black box invasion).  Such items might include loans to executives, performance bonuses, excessive travel reimbursements (such as first-class travel or reimbursement for tips in transit), expensive restaurant tabs and alcohol bills, but also items like settlements of harassment claims or related court costs.  Since harassment claims often are subject to nondisclosure agreements, it does not seem appropriate for The MLC to be able to recover such payments from black box invasion.  None of those items should be deductible from the Administrative Assessment and should never be the cause of a black box invasion.

It must also be said that “collective total costs” includes “bad debt.”  This caught my eye.  “Bad debt” is generally defined as a contingency or credit extended (such as to a customer) that is determined to be uncollectable.  Why would a pass-through quango like The MLC which has all of its costs covered by a third party need to be extending credit or loaning money to anyone, certainly not to any employee, board member, or vendor?  Under these circumstances, how would the bad debt be matched according to GAAP?  What controls are there within The MLC to disclose bad debt?  And why should bad debt be able to cause a black box invasion?

A corollary to bad debt is the indebtedness of The MLC itself as a borrower.  Again, given that the collective total costs are underwritten by a third party, why would The MLC need to borrow any money at all?  One could imagine that The MLC might properly have a modest bank credit line for cash flow purposes, but servicing any credit line should not result in a black box invasion, nor should the black box be used as collateral for any loan.

Paying Songwriters Who Claim or Are Matched After the Loan

The other drafting glitch I spotted that I would recommend needs closing up has to do with subsequent matching and paymenting.  What happens if there is a call on the black box invasion funds loaned to The MLC after the loan is made but before it is repaid.  These black box invasion loans should not delay matching and should also not delay payment of royalties matched after the loan is disbursed.

The easiest solution for a call on these loaned funds is to require the board members (or their companies) to cover the required funds, but I really think the Copyright Office needs to address the potential to abuse this tempting power.  Abuse of this power is exactly the kind of thing that could give rise to the very “waste, fraud and abuse” Congress wants the Copyright Office to take into account in the quinquennial review and potential redesignation (discussed above).

Yield Not Unto Temptation:  Detection Leads to Correction

This comment is not intended to be a knock on The MLC.  I am simply noting that any MLC may face the temptations that have certainly been irresistible for many smart people similarly situated in other contexts.  This kind of loan might well be a breach of a fiduciary duty by board members, and certainly would be in other similar situations.

It also must be said anecdotally that there are many songwriters who, perhaps unfairly, think that publishers use black box payments as a slush fund to run their operations with interest-free loans as the hygienically named “interim applications” would be.

The problem is that without the disinfectant of sunlight, there may be no detection to lead to correction.  Who would not prefer to avoid that problem who was able to avoid it?

* * * * * * * * * * * * *

[1] 17 U.S.C. § 115 (d)(7)(C).

[2] I have also discussed this clause off the record in the context of the Dispute Resolution Committee and Unmatched liability safe harbor for The MLC with friends at CMOs outside of the U.S.  When the laughter subsided, they all said that if they did anything like this they’d be fired long before they hit the gross negligence threshold.  “Heads on pikes” was the description.  We must then wonder what the CMOs think of this clause and what in the world they think the Americans are up to.  The Office might want to ask them.

[3] 17 U.S.C. §115 (d)(3)(H)(i).

[4] It appears that royalties held by the Dispute Resolution Committee for disputed works will also be kept in the black box account and presumably would be subject to invasion.  “The dispute resolution committee established under subparagraph (D)(vi) shall establish policies and procedures…that shall include a mechanism to hold disputed funds in accordance with the requirements described in subparagraph (H)(ii) pending resolution of the dispute.”  17 U.S.C. § 115 (d)(3)(K)(ii).  Subparagraph (H)(ii) provides for an “Interest-bearing account.—Accrued royalties for unmatched works (and shares thereof) shall be maintained by the mechanical licensing collective in an interest-bearing account that earns monthly interest….”

[5] Presumably this issue will be addressed in the Copyright Office Unclaimed Royalties Study of best practices on both matched but unclaimed and unmatched royalties.  Even so, this may be a good place to insert a true escrow account for the mandated interest-bearing account for the black box so that the account is held by a third-party bank unrelated to The MLC, the DLC, their board members or their vendors.  There should be specific withdrawal instructions to that third-party bank.  I find it difficult to understand why anyone would oppose such an ethical separation.

[6] The loans are limitless because there is no limitation on the amount in Title I.  The loan could theoretically even exceed the amount of the then-existing black box and be taken from a future accrual.

Copyright Office Regulates @MLC_US: Selected Public Comments on MLC Transparency: @MusicReportsInc

This post first appeared on Artist Rights Watch.

[Editor Charlie sez: The U.S. Copyright Office is proposing many different ways to regulate The MLC, which is the government approved mechanical licensing collective under MMA authorized to collect and pay out “all streaming mechanicals for every song ever written or that ever may be written by any songwriter in the world that is exploited in the United States under the blanket license.”  The Copyright Office is submitting these regulations to the public to comment on.  The way it works is that the Copyright Office publishes a notice on the copyright.gov website that describes the rule they propose making and then they ask for public comments on that proposed rule.  They then redraft that proposed rule into a final rule and tell you if they took your comments into account. They do read them all!

The Copyright Office has a boatload of new rules to make in order to regulate The MLC.  (That’s not a typo by the way, the MLC styles itself as The MLC.)  The comments are starting to be posted by the Copyright Office on the Regulations.gov website.  “Comments” in this world are just your suggestions to the Copyright Office about how to make the rule better.  We’re going to post a selection of the more interesting comments.

There is still an opportunity to comment on how the Copyright Office is to regulate The MLC’s handling of the “black box” or the “unclaimed” revenue.  You can read about it here and also the description of the Copyright Office Unclaimed Royalties Study here.  It’s a great thing that the Copyright Office is doing about the black box, but they need your participation!

This comment from Music Reports gives some interesting insights into how The MLC is favoring the NMPA’s formerly wholly-owned Harry Fox Agency (HFA) which has been on the wrong side of most of the licensing debacles.  Chris posted some analysis on MediaNet’s comment about criticisms of the HFA-The MLC contract as well as its rather odd timeline as revealed at The Copyright Office roundtables on the next cluster jam, the unclaimed royalties.  At least that has the entertainment value of watching them steal in plain site with the Copyright Office drinking game of who will make the excuses for them this time like we don’t notice.  We’re not big MRI fans (or MediaNet fans for that matter), but when they’re right, they’re right.

The sad truth is that this entire MLC exercise has become about the rich getting richer from a data land grab for independent songwriters and publishers who have been duped into thinking it’s all for their benefit.  It was all so predictable, but nobody listened.  This is what they wanted, and now they’ve got it.  How about a rule that says if you had your fingerprints on any part of the debacle of the last 20 years, you are immediately disqualified?  Bye bye HFA, NMPA, MRI, MediaNet.  Unfortunately that is not and never will be the rule because these are the same people who make the rules and are the same people who gave songwriters frozen mechanicals from 1909-1978 and are still freezing the 9.1¢ statutory royalty for fourteen years.

MRI could have done with some editing, but stick with it, they make a lot of sense.]

Read Music Reports entire comment here.

Music Reports generally agrees with, endorses, and echoes the views of MediaNet as stated in the response to the NOI it filed today.

Music Reports also takes note of the MLC’s selection of HFA as a major provider of the capabilities required for its core operations. While the MLC is narrowly limited by the MMA to the principal purpose of administering the blanket license for Section 115-compliant audio-only streaming music services in the United States, and specifically prohibited from storing data about or administering public performance licenses, HFA/SESAC is not so constrained.

On the contrary, HFA/SESAC is free, as a non-regulated, for profit commercial music rights administration service, to administer any type of mechanical licenses. Moreover, SESAC, administers performance rights on a for-profit basis in competition with other PROs. Being hired by the MLC does not change the fact that HFA/SESAC is in competition with other commercial music rights administration services that are not the beneficiaries of a long term, highly-paid contract with the MLC. This is fair enough, so far is it goes.

snakeoil-cover-700x400-1

But as noted above, the boundaries between HFA/SESAC’s database and that which the MLC must build and make publicly available are completely unknown [want to bet that’s because they don’t exist?], as is the timeframe during which the former will substitute for the latter, and whether a proprietary MLC database built independently of HFA’s data will ever be the basis on which the MLC renders royalty distributions.

What is known, however, is that the MLC will enjoy publicity generated by its own statutory mandates (subsidized by the DLC), by the DLC itself, and by the Office, all of whom are authorized and required to devote budgetary allocations to direct publishers’ attention to registering their rights data with the MLC (the database of which is, for the foreseeable future, that of HFA/SESAC). Notwithstanding that the primary purpose of these provisions may be to publicize the existence of the database and of available unclaimed royalties, the consequence will be the direction of resources toward the focus of copyright owners’ attention on just one of several important, pre-existing music rights registries. This is in effect a set of reinforcing government subsidies of which one private enterprise, in competition with other marketplace actors, is the beneficiary.

To the extent HFA/SESAC directly benefits unfairly from a privileged place in the data ecosystem by virtue of this arrangement, the goal of the MMA to create a healthier music rights administration ecosystem will be perversely harmed by the creation of an uneven playing field that penalizes the investments in data made by other services. To be sure, other commercial services are free to compete with HFA to offer services to the MLC and others in the marketplace. But over time, a privileged place in the market’s information flow may distort competition to the determent of copyright owners and their administrators, DMPs, and the public.

Luckily, the Office can prevent this result quite simply by requiring that the MLC provide access to its public database on a competition-neutral basis.

As was noted above, there is an important temporal aspect to the management of music rights data. In order for two administrators to efficiently interoperate, they must be able to have a more or less shared contemporary view of the data about the works they are administering, even if they don’t always agree on every detail.

Therefore, the specific prescription called for here is a combination of the points made in the previous sections above: (a) the Office should use its authority under the MMA to adopt such regulations as it deems necessary to clarify that the public database which the MLC must establish and maintain will be identical to or at least contain the same data as the database on which the MLC will distribute royalties; (b) the MLC should make its public database available contemporaneously with the commencement of its royalty distribution efforts; and (c) the MLC must offer eligible parties bulk, machine-readable access to such data “on a basis that is both comprehensive and as frequent as necessary to efficiently manage the licensing and royalty distribution activities of the mechanical licensing collective itself, and not less than daily access to changed information within a day of any change to such information.”

Guest Post: Who Owns The MLC Database of Songs?

[This is crossposted from MusicTech.Solutions and is adapted from the author’s comment to the Copyright Office in the MLC regulations.]

By Chris Castle

If you’ve been following the evolution of the “aircraft carrier” revision of the U.S. Copyright Act styled the “Music Modernization Act,” you will remember that America now has a blanket license for the mechanical reproduction of songs (or will have as of 1/1/21).  The “MMA” comes in three parts (or as I say three and one-half):

  • Title I which establishes the blanket license, a willing-buyer willing-seller standard for mechanical royalty rate setting, the Mechanical Licensing Collective (called the “MLC”), the all-important safe harbor for Big Tech’s massive infringement of songs, and authorized the creation of the “musical works database” which is the subject of this post;
  • Title I-1/2 which gives certain small benefits to ASCAP and BMI;
  • Title II which provides meaningful relief and largely fixes the pre-72 loophole that the Turtles sued over (formerly the CLASSICS Act); and
  • Title III which gives producers a statutory basis for SoundExchange royalties, another truly meaningful change.

I supported Title II and Title III, but I have lots of bones to pick with Title I, not the least of which has to do with the musical works database.  A lot of my issues have to do with what I perceive as sloppy drafting and a mad rush to “get a bill” at all costs which has led to a strong need to “fix” a lot of “glitches” in Title I itself (such as the failure to dovetail the major change in the compulsory mechanical from a per-song basis to a blanket basis. This in turn has an affect on other copyright provisions such as the termination right for songwriters which is now having to get solved–maybe–through the caulking of regulations to cover sloppy workmanship.  (Caulk cracks.)

For those of us who sweep up behind the elephants in the circus of life, I fear that the musical works database of other people’s things is an 11th Century solution to a 21st Century problem–a list of things that will be very difficult to get right and even more difficult to keep right, not unlike William the Conqueror’s Domesday Book.  Static lists of dynamic things necessarily are out of date the moment they are fixed.

Domesday-book-1804x972

Who Owns the Crowdsourced Musical Works Database?

We are going to discuss Title I musical works database today from a very simple threshold question:  Who owns it?

Spoiler alert:  The public owns it.  This is logical, but like so many things in the drafting of Title I, the drafting is glitchy, which is what you call it if you’re in a good mood.  I apocryphally attribute the term “glitch” when applied to massive Internet data breaches to the Fathers of the Internet who did not take care that the cracks were sealed (looking at you, Vint Cerf).

When you consider that the most valuable asset of the MLC is going to be the song database, ownership matters.  This database of other people’s things must be created by the efforts of potentially hundreds of thousands of songwriters given no choice in the matter.  It would be a bit much for the U.S. Congress to require all this only to enrich one U.S. corporation controlled by the U.S. publishers by leveraging a compulsory license to create a very valuable private asset.  Particularly a database paid for by still other people that might then get taken and given to a replacement MLC.  (There’s that “taken” word again.)  That’s typically not what Congress does.

Ownership matters to the Digital Licensee Coordinator, too.  Let’s also remember that on paper, the MLC does not pay a penny for the cost of its operations, including the creation of the database.  The entire cost of the MLC’s operations is borne by the users of the blanket license through an organization called the Digital Licensee Coordinator.  (If you’re thinking what’s with these names, I know, I know.  Forget it, Jake, it’s Washington.)

This database ownership issue has been raised to authorities a couple times, and no one has answered it.  I made it part of a recent comment I filed with the Copyright Office in the current rule making for regulations implementing Title I.  Maybe they’ll get around to answering the question this time.  After a while, you have to wonder why they have not.

The MLC’s Short Track Record on Ownership of Other People’s Things

A side note demonstrating both that ownership matters and that The MLC is thinking about ownership:  a service mark registration for “The MLC”.  (A service mark is a kind of trademark.)  There is a difference between “the MLC” and “The MLC”.  That’s because “the MLC” is the organization envisioned by the Congress that has to be redesignated (think “re-approved”) by the Copyright Office every five years.  On the other hand, “The MLC” refers to “The MLC, Inc.” which is the corporation created by the super popular proponents of Title I who were designated the first MLC and who style themselves “The MLC” using the definite article. But if I told you that there was a difference between “the MLC” and “The MLC” would you find that confusing?

The clear implication of the definite article seems to be that they don’t envision any future in which they will not be the MLC, i.e., will not be redesignated.  They also probably don’t envision a future where a different corporation would be designated the MLC and The MLC would be looking for something to do.  Maybe they know something we don’t, but there it is.

This also raises some interesting trademark questions should The MLC seek to prevent a successor from trading under the name “MLC”, interesting enough to stop The MLC from claiming a proprietary interest in the statutory description.  That mark is arguably descriptive and probably should be denied.  In fact it’s so descriptive it actually asserts a private intellectual property interest in the statutory language that describes the organization created by statute.  Sort of like asserting a trademark in “TVA” or “ICC” or “FOIA”.

MLC TM Registration

Should Songwriters Bust a Move to Create Value for The MLC?

Let’s be clear about who owns the Congressional database.  As you will see, the musical works database does not belong to either the MLC or The MLC.  If there is any confusion about that, the Copyright Office should clear it up right away (which would save having to go to other avenues to do the same thing).  There really isn’t a practical alternative to the Copyright Office jurisdiction.  Congress gave the Copyright Office broad regulatory powers over the MLC (and, therefore, The MLC).

The public “musical works database” that Congress envisioned in Title I of the Music Modernization Act is largely a crowdsourced asset.  Congress has asked the world’s songwriters or copyright owners to spend considerable time preparing their catalogs in whatever format The MLC and the DLC determine is good for The MLC (with the Office’s blessing through regulations).  There inevitably will be quality control and accuracy review costs invested by the world’s songwriters and copyright owners in making sure that their catalogs are correctly reflected in the musical works database.  “Copyright owners” may also include sound recording copyright owners asked to contribute their ISRCs or other data that they, too, have invested considerable expense in creating and maintaining.

Unfortunately, the transaction cost to the songwriter and copyright owner for participation in The MLC and crowdsourcing Congress’s database is an unfunded mandate at the moment.  From a commercial perspective, the dynamic evolution of data is a potentially limitless expense, yet we have both this unfunded mandate which will spike in the early years but continue on a rolling basis essentially forever.  Yet the MLC’s administrative assessment appears to be capped at a fixed increase by a settlement agreement.  Again, a “glitch.”  Still, The MLC’s executives seem positively giddy about their prospects with all the relief of someone who got tapped for lifetime employment with a pension (no doubt) while the songwriters these leaders are to serve are having the fight of their lives for survival.

What Did Congress Do?  Or Not Do?

Yet, it seems clear that at the time of passing Title I, Congress had no intention of using a public law to create a private asset.  Neither was their intention to use the law to leverage the creation of an asset for private ownership by whoever the head of the U.S. Copyright Office designated to be the MLC, regardless of how “popular” they might have been.

The creation of the musical works database is replete with hidden costs paid or incurred by songwriters and copyright owners.  Neither the Congress nor the Copyright Royalty Judges  were asked to directly address these hidden costs of creating the musical works database.   (The Copyright Royalty Judges (or “CRJs”) are relevant because they approve the DLC’s financial contribution to the MLC through the “Administrative Assessment.”  The assessment is intended to cover the “collective total costs” which includes broad categories of cost items related to the database.)  And as usual, these costs appear to have gone straight over the heads of the Congressional Budget Office in their mandated assessment of the costs of Title I.

Even so, the MMA Conference Report from Congress addresses the cost issue head on:

The [Congress] rejects statements that copyright owners benefit from paying for the costs of collectives to administer compulsory licenses in lieu of a free market. Therefore, the legislation directs that licensees should bear the reasonable costs of establishing and operating the new mechanical licensing collective. This transfer of costs is not unlimited, however, since it is strongly cabined by the term ‘‘reasonable.’’[1]

It will be impossible for the “new mechanical licensing collective” to fulfill its statutory duties or build the complete musical works database to which the United States aspires without songwriters and copyright owners around the world doing the intensive and costly spade work to prepare their data to be exported to The MLC.[2]  It is clear that the reasonable costs of preparing and exporting that data should be borne by The MLC[3] as part of the “Administrative Assessment.”[4]  This material cost clearly is covered by the definition of “collective total costs”[5] and so was, or should have been, included in the current Administrative Assessment,[6] unless the intention was to cover The MLC’s side of these costs and force songwriters and copyright owners to eat their side of the same transaction.  If that is the case, it would be helpful for the Copyright Office to clarify that intention in the name of transparency through their broad regulatory authority.

If there is another drafting glitch there, it is worth noting that the CRJs clearly contemplated revisiting the Administrative Assessment  on their own motion for good cause.[7]  If there were ever good cause, the staggering cost of registering potentially millions of songs would be it.[8]

It should be clear that no one’s intention was for the services to pay to create the musical works database and for the songwriters and copyright owners to labor to export their data to make the musical works database complete, only to have The MLC claim ownership of the musical works database, particularly if The MLC were not redesignated as the MLC following the five-year review by the Copyright Office.  That unhappy “take my ball and go home” arbitrage event is foreseeable and would entirely cut against the “continuity” contemplated by Congress.[9]

It is critical that the Copyright Office clarify in regulations that neither The MLC nor any other MLC owns the musical works database.  In fact, the MMA clearly states that “if a new entity is designated as the mechanical licensing collective, [the Office shall] adopt regulations to govern the transfer of licenses, funds, records, data, and administrative responsibilities from the existing mechanical licensing collective to the new entity.”[10]  Since The MLC will have to transfer the musical works database and the other statutory materials to the new MLC if they fail to be redesignated, there should be no misconceptions that The MLC “owns” the database and could withhold all or part of it.[11]  Because The MLC is just An MLC.

It should also be made clear that any MLC or DLC vendor does not obtain an ownership interest in any copy of all or part of the musical works database they may obtain for any reason.

Again, just like the termination right “glitch”, these are threshold questions that should have been answered in the statute itself.

Clarifying ownership of The MLC’s most important asset should be an easy ask of the Copyright Office.  Watch this space to find out if it is.

          * * * * * * * * *

[1] Report and Section-by-Section Analysis of H.R. 1551 by the Chairmen and Ranking Members of Senate and House Judiciary Committees, at 1 (2018) at 2 (emphasis added).

[2] This effort is referred to as “Play Your Part™” a business process trademarked by The MLC available at https://themlc.com/preparing-2021.

[3] I would point out that the way The MLC should work—and in the end probably will end up functioning as a practical matter–is that The MLC needs to be able to handle however songwriters ingest their data.  Instead, it appears that The MLC is trying to dictate to all the songwriters in the world how they should assemble their song data beforethey register with The MLC. If The MLC wants to shift that burden, they should expect to pay for it.  Otherwise, this is exactly backwards.

[4] 17 U.S.C. §115 (d)(7)(D).  The Administrative Assessment is what makes the MLC different from other PROs or CMOs where members bear their own cost of participation.  The Administrative Assessment is to cover the entire cost of creating the musical works database, not just The MLC’s startup or overhead costs.  If nothing else, another way to treat these out of pocket costs is as a contribution to the operating costs of The MLC by songwriters and copyright owners that should be offset against future Administrative Assessments.

[5] 17 U.S.C. § 115 (e)(6).

[6] Order Granting Participants’ Joint Motion to Adopt Proposed Regulations, In re Determination and Allocation of Initial Administrative Assessment to Fund Mechanical Licensing Collective (U.S. Copyright Royalty Judges Docket No. 19-CRB-0009-AA (Dec. 12, 2019)).

[7] The CRJs included this footnote in their ruling on the administrative assessment (emphasis added):  “The Judges have been advised by their staff that some members of the public sent emails to the Copyright Royalty Board seeking to comment on the proposed settlement agreement. Neither the Copyright Act, nor the regulations adopted thereunder, provide for submission or consideration of comments on a proposed settlement by non-participants in an administrative assessment proceeding. Consequently, as a matter of law, the Judges could not, and did not, consider these ex parte communications in deciding whether to approve the proposed settlement. Additionally, the Judges’ non-consideration of these ex parte communications does not: (i) imply any opinion by the Judges as to the substantive merits of any statements contained in such communications; or (ii) reflect any inability of the Judges to question, [on their own motion without a filing from a participant] whether good cause exists to adopt a settlement and to then utilize all express or reasonably implied statutory authority granted to them to make a determination as to the existence…of good cause [to reject the settlement now or in the future].”   Order Granting Participants’ Joint Motion to Adopt Proposed Regulations, In re Determination and Allocation of Initial Administrative Assessment to Fund Mechanical Licensing Collective (U.S. Copyright Royalty Judges Docket No. 19-CRB-0009-AA (Dec. 12, 2019) n.1 (emphasis added)).

[8] There is a simple solution to determining these costs to songwriters and copyright owners.  The Copyright Office could designate several metadata companies who could compete to handle the various steps of creating and exporting metadata to The MLC, such as in the CWR format, for example North Music Group and Crunch Digital have such tools.  To avoid picking winners and losers and to preserve competition, the Office could alternatively establish a benchmark of quality control or some other criteria for becoming an approved company.  The costs charged would likely vary depending on the size of the catalog, but The MLC need only pay the invoice of these companies which would be included in the Administrative Assessment.  Obviously, the entity performing such work should be independent of The MLC, the DLC or any of its members, or any of their respective vendors.  This would, of course, introduce the concept of competition into the monopoly which may interest no one but might benefit everyone.

[9] See H. Rep. 115-651 (115th Cong. 2nd Sess. April 25, 2018) at 6 (hereafter “House Report”); S. Rep. 115-339 (115thCong. 2ndSess. Sept. 17, 2018) at 5 (together with identical language, hereafter “legislative history”) (“Although there is no guarantee of a continued designation by the collective, the Committee believes that continuity in the collective would be beneficial to copyright owners so long as the entity previously chosen to be the collective has regularly demonstrated its efficient and fair administration of the collective in a manner that respects varying interests and concerns. In contrast, evidence of fraud, waste, or abuse, including the failure to follow the relevant regulations adopted by the Copyright Office, over the prior five years should raise serious concerns within the Copyright Office as to whether that same entity has the administrative capabilities necessary to perform the required functions of the collective.”)

[10] 17 U.S.C. § 115 (d)(3)(B)(ii)(A)(II).

[11] It seems that if an incumbent MLC that was not redesignated and continued to operate, it would almost unavoidably compete with the newly designated MLC but with a substantial leg up.  I realize there have been some statements made about The MLC taking on work beyond the blanket license, such as voluntary licenses.  That additional work might require additional investment, or a sharing of the total collective costs by third parties.  I have not addressed that allocation as I for one would like to see The MLC stick to their knitting and succeed at the job they are obligated to do, and, frankly, paid to do, before worrying about expanding into profitable roles for the non-profit corporation.   It does seem that if The MLC is not redesignated, there would not be much for them to do once they transfer the public’s assets to the new MLC.

Guest Post: Copyright Office Regulates the MLC: Selected Public Comments on MLC Transparency: MediaNet

By Chris Castle

The wisest among us learn to use their portents well
There’s no need to hurry, it’s all downhill to hell.

From “Don’t Stand Still“, written by Original Snake Boy, performed by Guy Forsyth

The Copyright Office has solicited comments on the transparency of The MLC and received quite a few well-thought out comments (if I say so myself).  MediaNet

has raised some very interesting questions about the NMPA’s relationship with HFA and The MLC that many have questioned both in prior comments and in the many lawsuits against HFA clients like Spotify for its various licensing failures.  (Note that I don’t really fault HFA all that much because I think it really boils down to choices made by Spotify, another Internet company that is in a rush to enrich themselves at the expense  of songwriters and artists.  If you can fault HFA for one clear choice in that cluster, it’s that they didn’t resign from the job both during and after their ownership by NMPA and SESAC.  Maybe they got stock, too.)

MediaNet raises this interesting point:

In passing the MMA, Congress recognized that the party who controls the database may enjoy an economic advantage over others.9 Although not applicable to the MLC-HFA contract, The Federal Acquisition Regulation System, codified at 48 C.F.R. § 1.000 et seq., provides guidance regarding the principle cited by Congress under the MMA. For example, under FAR 9.505 a contracting officer cannot award a federal contract to a contractor where an organizational conflict of interest (or “OCI”) cannot be avoided or mitigated.

But here’s the clincher:

Applying the principles from the FAR, the arrangement between MLC and HFA raises a number of questions regarding the potential for unfair economic advantage to HFA as a consequence of its control over the operation and administration of the MLC database, including the following:

· Who owns the database, MLC or HFA? [The answer is neither]

· If HFA is terminated by MLC, does HFA own or have a claim to any proprietary or intellectual property rights in the database?

· Will HFA have access to “Confidential” or “Highly Confidential Information” (e.g., contract terms, payments and financial information) of music publishers or other similarly situated organizations such as PROs and administration service providers?

· Will HFA have access to the reporting of usage and required payments of the administrative assessment by significant nonblanket licensees (“SNBLs”) in the notices of nonblanket activity (“NNBAs”) required under the MMA?

· Sources suggest HFA may offer [an “ethical wall”] between its work on the MLC database and other work for third parties not using the blanket digital license, and an audit right to ensure HFA complies with this separation. Can HFA effectively separate such third party work from the database it administers for the MLC?

What are the remedies for non-compliance with such measures?

MediaNet respectfully requests that the Copyright Office, as part of its regulatory and oversight authority to ensure transparency, require that the agreements between MLC and all of its vendors be made publicly available, and with respect to the MLC agreement with HFA, if the information requested above is not disclosed in such agreement, require MLC and HFA to submit answers to the forgoing questions.

It should be obvious to everyone that there is an inherent conflict of interest between NMPA and HFA.  Insufficient care was taken at the Copyright Office and at The MLC to create systems to reduce the fact of this conflict negatively affecting the operations of The MLC which presents an opportunity to leave the bad days behind.  But that didn’t happen and here we are again.

But let’s not forget that The MLC is essentially a quasi-governmental organization and must comply with the Copyright Office’s oversight role despite the intimidation tactics.  And the Copyright Office is already looking a bit ragged around the edges from even the little connection to corrosion they’ve had to date.

For example, the Copyright Office announced that “the Butler Report” was commissioned by the Copyright Office to poll ex-US CMOs about their black box practices, knowledge which likely was common to everyone on The MLC’s board.  I must have missed where this work product was put out for bid, which leads me to think it was a single source consulting contract which is what they use to pave the road to hell when good intentions have supply chain disruptions.  Nothing against Susan Butler who is very competent and engaging, but I can think of several academics who would be better suited and would have been peer reviewed.  We can disagree about that, but why not have them submit proposals?  And also deliver all the work product that the taxpayer financed?

MediaNet raises many more excellent points about the inherent conflicts in the NMPA-The MLC-The HFA relationship and The Copyright Office’s designation process that are well worth reading.  You can find the full comment here.

And keep this in mind:

MLC executive Richard Thompson said at the Copyright Office panel on unclaimed royalties last December,[1] “[A] lot of the time since July has been spent working very closely with the staff at HFA and ConsenSys, really starting to nail down how all of this is going to work at the, you know, lowest operational level, all of the things that we need to work out.”  (Referencing the July 8, 2019 designation of The MLC as the MLC.)  Of course, The MLC didn’t announce the selection of HFA and ConsenSys until November 26, 2019. [2]

If The MLC was already working with HFA in July as Mr. Thompson says, why did they give the world the impression that they had not picked a vendor until November?

 

 

 

[1] Transcript, United States Copyright Office Unclaimed Royalties Study Kickoff Symposium (Dec. 6, 2019) at 28 ln 15.  (my emphasis)

[2] Tatania Cirisano, Mechanical Licensing Collective Selects Leadership, Partners for Copyright Database, Billboard (November 26, 2019).

 

Why So Secretive? Copyright Office’s Public Consultation on Setting Rules for MLC’s Operation: Future of Music Coalition

[The Copyright Office is bravely trying to regulate The MLC to keep the MMA from becoming a feeding frenzy for the data lords.  As Chris Castle said in his comment on what should be stamped “Confidential” and kept away from songwriters: “The premise of confidential information under Title I is that there is in rock and roll certain information deserving of government-mandated secrecy.”  Or as Otis said, too hot to handle.  Keep that in mind–when they say “confidential information” they mean information they can keep away from you.

We are going to excerpt some of the good comments that support independents in the other Copyright Office “rulemaking” consultation that just closed devoted to confidential treatment of data by The MLC and the DLC.  You can read them all here.]

The Future of Music Coalition made some great points in their filing, read the whole thing here.

Restrictions on use by MLC and DLC Vendors and Consultants FMC shares concerns expressed by other commenters about the possibility of vendors using confidential data for competitive advantage or purposes beyond what the MLC was created to do. There should be no provision for HFA to use confidential data for “general use”, even on an opt-in basis. The risk of anti-competitive harm is too great.

Copyright Office Regulates @MLC_US: Selected Public Comments on MLC Transparency: @JonathanCoulton

[Editor Charlie sez: The U.S. Copyright Office is proposing many different ways to regulate The MLC, which is the government approved mechanical licensing collective under MMA authorized to collect and pay out “all streaming mechanicals for every song ever written or that ever may be written by any songwriter in the world that is exploited in the United States under the blanket license.”  The Copyright Office is submitting these regulations to the public to comment on.  The way it works is that the Copyright Office publishes a notice on the copyright.gov website that describes the rule they propose making and then they ask for public comments on that proposed rule.  They then redraft that proposed rule into a final rule and tell you if they took your comments into account. They do read them all!

The Copyright Office has a boatload of new rules to make in order to regulate The MLC.  (That’s not a typo by the way, the MLC styles itself as The MLC.)  The comments are starting to be posted by the Copyright Office on the Regulations.gov website.  “Comments” in this world are just your suggestions to the Copyright Office about how to make the rule better.  We’re going to post a selection of the more interesting comments.

There is still an opportunity to comment on how the Copyright Office is to regulate The MLC’s handling of the “black box” or the “unclaimed” revenue.  You can read about it here and also the description of the Copyright Office Unclaimed Royalties Study here.  It’s a great thing that the Copyright Office is doing about the black box, but they need your participation!]

Read the comment by Jonathan Coulton

I am an independent musician, and I make my living full time as such. I have spent years dealing with the wide array of entities who collect royalties on my behalf. Errors happen all the time – songs are misattributed, missing, publisher information is wrong, royalty splits are wrong. This is to be expected when the dataset is this vast and complicated, and coming from many disparate sources. This is why for me, absolute transparency is essential. I need to be able to search for my name and my song titles so that I can look for errors like these and make sure I am getting paid all the royalties I am due. As an independent, my slice of the pie is very small on the scale of the entire industry, but it is essential to me and my ability to make a living. I have nobody but myself representing me in this process. Even with the best intentions, an entity like the MLC cannot possibly look out for all of us, so I hope that this structure provides us the tools with which we can look out for ourselves.

I very strongly encourage maximum transparency, granularity, and searchability be provided to rightsholder with regards to this data.

Copyright Office Regulates @MLC_US: Selected Public Comments on MLC Transparency: @zoecello — Artist Rights Watch

[Editor Charlie sez: The U.S. Copyright Office is proposing many different ways to regulate The MLC, which is the government approved mechanical licensing collective under MMA authorized to collect and pay out “all streaming mechanicals for every song ever written or that ever may be written by any songwriter in the world that is exploited in the United States under the blanket license.”  The Copyright Office is submitting these regulations to the public to comment on.  The way it works is that the Copyright Office publishes a notice on the copyright.gov website that describes the rule they propose making and then they ask for public comments on that proposed rule.  They then redraft that proposed rule into a final rule and tell you if they took your comments into account. They do read them all!

The Copyright Office has a boatload of new rules to make in order to regulate The MLC.  (That’s not a typo by the way, the MLC styles itself as The MLC.)  The comments are starting to be posted by the Copyright Office on the Regulations.gov website.  “Comments” in this world are just your suggestions to the Copyright Office about how to make the rule better.  We’re going to post a selection of the more interesting comments.

There is still an opportunity to comment on how the Copyright Office is to regulate The MLC’s handling of the “black box” or the “unclaimed” revenue.  You can read about it here and also the description of the Copyright Office Unclaimed Royalties Study here.  It’s a great thing that the Copyright Office is doing about the black box, but they need your participation!]

Comment by Zoë Keating:

Some version of the usage data that the DSPs report to the MLC should be easily accessible to the public so that songwriters do not need to hire a legal team in order to independently verify if their statements from the MLC are correct. Major publishers can and will continue to get usage reports directly from music services. Self-published songwriters must rely on the MLC to collect and administer royalties on their behalf. Given that the major publishers of the NMPA are directing the design of the MLC, transparency of the reported data from DSPs will help eliminate any conflicts of interest.

Related to this, given the past occurrence of and future likelihood of metadata reporting errors*, usage data for compositions that are unmatched to any owner should be publicly searchable. Songwriters and other entities should be able to search for likely misspellings and errors, thereby offering crowd-sourced assistance to the persistent problem of unmatched royalties. (*Anecdotally I have heard of metadata errors preventing the collection of mechanicals and it happened to me. The mechanical royalties for my songs went unclaimed for 10 years until 2019 until I was able to raise an employee of HFA via twitter who then “found” $5000 that had been unmatched due to an unspecified metadata error.)

via Copyright Office Regulates the MLC: Selected Public Comments on MLC Transparency: @zoecello — Artist Rights Watch–News for the Artist Rights Advocacy Community

David Lowery’s Suggestions to the Copyright Office for Regulation of the Mechanical Licensing Collective Part 4

The US Copyright Office solicited comments from the public about the operations of the Mechanical Licensing Collective.  The first round of those comments (called “initial comments”) were due in November and the second round of those comments (which are called “reply comments” because they essentially comment on the initial comments) were due December 20.

All the comments focus on some central themes that seem to be on everyone’s mind which can be boiled down to oversight, oversight and more oversight.  While the DLC controls the MLC’s purse strings, the MLC has been given largely uncontrolled power over songwriters that needs to be checked by the government on behalf of the governed.

David Lowery did not file initial comments but as he notes, developments made him feel compelled to speak up in the reply comments.  We’re going to post his reply comments in four parts, and then we’ll post other commenters who we think made really good points (like CISAC and BIEM among others).  (If you want to skip ahead and read the entire comment, you can download it here.)  This is Part 4 of four parts.

Comments of David C. Lowery, Notice of Inquiry for Blanket License Implementation Regulations Issued by the United States Copyright Office Concerning the Orrin G. Hatch-Bob Goodlatte Music Modernization Act of 2018

Additional MLC Oversight: Transparency and Financial Disclosure

There is little financial disclosure required of the MLC or the DLC. As far as DLC is concerned, I expect they will represent the interests of the services. They are also paying the money for MLC which in a way is itself an inherent conflict but is under the oversight of the Copyright Royalty Judges. For the moment, DLC does not appear to be involved in the MLC operations or decision-making. Time may reveal a need to examine this relationship more closely for financial disclosures.

However, the MLC is mandated to engage in many operations fraught with moral hazard, not the least of which is matching and the black box distributions. The MLC has already demonstrated that it has the ability to pick the least appropriate vendors for inexplicable reasons other than the past ownership of HFA by the National Music Publishers Association.

This past ownership creates a special disclosure situation regarding the selection of HFA as a vendor given how long Title I had been in the works (the rumored “SIRA II”). Was the sale of HFA conditioned on HFA becoming the principle vendor of the MLC (like HFA was to be the “General Designated Agent” in SIRA I)? Was Blackstone’s withdrawal of opposition to MMA in the Senate conditioned upon some benefit flowing to HFA? Has the vendor selection process been the kabuki dance it appears to be? As my friend and co-amici Guy Forsyth wrote, “Americans are freedom loving people and nothing says freedom like getting away with it.” Did they get away with it? If the Copyright Office doesn’t force disclosure, we’ll never know unless the issue gets litigated in one of the pending lawsuits against Spotify—and isn’t redacted.

It only seems reasonable that the MLC should disclose any incentives, payments or other benefits received by its board members, non-voting members (DiMA, NMPA, NSAI or SONA for example), officers and other key employees from any person or entity MLC does business with. These benefits should include payments of the administrative assessment, real estate transactions paid for by the assessment, or shares of stock or units of Ether granted to anyone in the supply chain. This kind of anti-payola affidavit is required of various consultants in the music business already so there seems to be no reason why it should not be required for persons of influence at the MLC. And, of course, all such affidavits or disclosures should be part of the public record so that everyone from songwriters to Members of Congress should be able to have a clear picture of who is involved with MLC.

This will be particularly applicable to any payments from the black box which is truly other people’s money. Any proposed payments of the black box should be itemized, published online in an easy to read format prior to being distributed and certified by an independent CPA that is not related to MLC or any board member or vendor. This disclosure may help reduce the inevitable lawsuits. In fact, it would be best if any CPA undertaking certification work for MLC should agree in advance that they would do no other work for the MLC related parties for a significant period of time, say five years.

The “interim application of accrued royalties” is another clause that is fraught with conflicts of interest. Respectfully, the Copyright Office should clarify that MLC board members act as fiduciaries in their decisions to take money from the black box to meet the MLC’s expenses in the case of a shortfall from the administrative assessment. If they’re not fiduciaries, an explanation would be helpful.

In fact, the entire clause relating to the “interim application of accrued royalties” is itself vague and ambiguous. Consider the language:

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 collective total costs, the collective, with approval of its board of directors, 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.

This paragraph is, in my judgment, one of the most important yet least discussed clauses in the entirety of Title I. Absent implementing rules to the contrary, the clause allows MLC to effectively write itself interest free and nonrecourse loans from other people’s money to cover the costs of a budget that MLC itself determines at a burn rate solely in the control of MLC—currently with no oversight by anyone.

The clause raises a number of questions about the meaning of the statutory language which the Congress likely intended to be clarified in regulations regarding the spending of other people’s money by the MLC. In particular. terms in the statutory language that must be known in order to determine what sums are the “costs” concerned, when are they determined, and what happens if the loan once taken is never repaid. (Which raises income tax issues if nothing else.)

The statutory language also leaves to regulations what happens if the songwriters whose monies are taken from the black box and spent by MLC are later identified because they come forward or due to matching efforts of the DLC or the MLC.

Are those songwriters supposed to wait to be paid from “future collections of the assessment,” if ever? Which future collections? The next assessment after those songwriters are identified? Or another one some time in the future?

Are they to be paid in the normal course at the next accounting period after becoming identified? Immediately upon being identified?

And most importantly perhaps, how will anyone outside of the MLC know this loan is occurring? The mere fact that a board of directors thinks it’s a good idea to avoid themselves having to make voluntary contributions to the MLC’s operations by writing themselves an interest free non-recourse loan from monies they hold in trust (or should hold in trust) is a terrible position to put on board members voting against the loan.

I would respectfully suggest that this entire clause has no place in legislation that was sold as a great boon for songwriters. If it must be in the law, then the Copyright Office has a golden opportunity to shed sunlight on another mysterious operation of the MLC.
I suggest several areas of mandatory disclosure. First, the balance of the black box should be public and prominently posted on a monthly basis to the MLC’s website. Songwriters should be able to search for their titles and determine how much is being held. SoundExchange currently has this feature for the public as do other societies around the world.

The black box should be held in a true escrow account by an escrow agent (such as an unrelated bank) that has clear instructions in regulations as to how and when such funds are to be disbursed, either as a loan or royalty payment.

If the board of MLC decides to write itself a loan from these funds, they should not be able to use the black box as a piggy bank, but rather should borrow against identified funds based on available metadata so that repayment can be accomplished efficiently.
For example, if Songwriter X can look up on the MLC’s website that the MLC board borrowed money for songs A, B and C that were unmatched at the time of the loan, then if Songwriter X is later identified, she can demand payment of her royalties from MLC which the MLC should be required to pay from its current accounts and not take from future black box payments.

Failing to require payment from fresh cash will create an endlessly iterative process by which MLC borrows from Peter to pay Paul, using old money to pay new obligations.
Finally, all these transactions should be well documented and those documents should be published on the MLC website. For example, the statute requires board “approval” to initiate the loan. That approval should take the form of a recorded board vote with minutes to be published on the MLC website, or better yet in the Federal Register. The loan should be documented in the form of a promissory note to the escrow agent. It should also be clear that the MLC board has a fiduciary duty to the songwriters and publishers whose money it is borrowing that is separate from the board’s safe harbor elsewhere in Title I.

Having just gone through the PledgeMusic debacle, I am sensitized more than ever to companies that go insolvent while handling the money of artists with the result that the artists never get paid. If the MLC cannot meet its obligations and requires “interim” loans from the black box, how is that not the case of a company operating while insolvent? Why should the officers and directors of MLC enjoy any lower standard of care or responsibility than they would if they were operating any other company while insolvent?

Surely this was not the intent of Congress.

Finally, I note that the budget proposed by the MLC to the DLC was less than the administrative assessment agreed to in the CRB settlement. Respectfully, the Copyright Office ought to make clear that this shortfall does not trigger the MLC’s ability to take an “interim” loan in the amount of the shortfall. This issue highlights another point requiring clarification—at what point is a shortfall determined? It seems that it should be at a time the shortfall occurs following investigation into why it occurred by an inspector general-type person (such as the Inspector General of the Library of Congress).

The MLC knows how much it’s got in its rather rich kitty to spend on all its various activities. If it also knows that if it goes over budget it can write itself interest free loans from the black box based on its own internal decision and authority, what incentive is there to stay on budget?

Additional MLC Oversight: Transparency and Songwriter Ombudsman

While Congress and the Copyright Office theoretically retain oversight over the MLC, this is of cold comfort to songwriters who are run over by MLC, its policies and its vendors. The vast unmatched problem is the most obvious foreseeable outcome where songwriters need a safety valve, but there are other possibilities.

For example, if the MLC continues HFA’s sad history of simply failing to pay songwriters, it’s just not adequate to say that songwriters can audit MLC or sue. Songwriters should not have to incur even more costs or engage in the labyrinthine process of individual or class action lawsuits against an entity funded by the largest corporations in the world.

The only real leverage that songwriters have over MLC is to persuade the Copyright Office not to re-designate the incumbent. In order for that to be a realistic threat, the Copyright Office regulations should provide for a feedback loop that songwriters can avail themselves of that the Copyright Office must take into account when determining its re-designation. Such complaints must be included in the Copyright Office’s oversight report to Congress. As such a practice is essentially the Copyright Office setting a policy or regulating itself, I see no reason why that practice cannot be set forth in regulations.

However, the Copyright Office is in an ideal position to create an ombudsman-type position with oversight of the entire MLC/DLC process. Such a role would allow the world’s songwriters an immediate outlet for surfacing negligence by MLC. By preserving anonymity of those complaining, any songwriter—whether or not affiliated with MLC—could have an outlet to report any objectionable behavior while being protected along the lines of the Whistleblower Protection Act.

The ombudsman should be completely unrelated to the incestuous practices of MLC and HFA, should be a paid position deducted from the millions in MLC’s rich operating budget, and should be meaningfully consulted in any re-designation.

Creating an ombudsman role would benefit the entire system by maintaining a watchdog and whistleblower role that would help keep the system honest.

Additional MLC Oversight: MLC and DLC Database Conflict of Interest Policy

I would also respectfully call the Copyright Office’s attention to the inherent conflicts between MLC and its vendor HFA in terms of reselling data HFA acquires by virtue of its role as MLCvendor. If the Copyright Office does not prohibit HFA from selling for other commercial purposes the data it acquires through its engagement by MLC to facilitate the compulsory blanket license, the Congress will have just handed HFA a near insurmountable advantage over its competitors. Remember there are other licenses like “micro sync” licenses that are outside of the compulsory mechanical license. Currently there is robust competition and innovation in this market segment, but without this prohibition HFA would crush its young competitors.

The same could be said of ConsenSys, which seems to be desperately seeking use cases for its Ether cryptocurrency. This creates an odd set of incentives for an MLC vendor, not to mention a need for disclosure by the MLC of any stock grants or Ether transfers.

Songwriters are compelled to do business with MLC despite bitter complaints about the imbalance in favor of major publishers in its governance. Songwriters are also compelled to do business with MLC despite bitter complaints about HFA due to what can be described as a bait and switch where the MLC pushed out a lot of hope only to go back to business as usual with long-time cronies.

This cannot be what Congress had in mind, and is even greater evidence for why the Copyright Office should require MLC candidates to fully disclose their vendors and their relationship with their vendors before designation.

Respectfully, any data vendor of the MLC should not be allowed to leverage their privileged role to private benefit after being paid absurd amounts of money to fail upwards.

As Madison said, we’re not angels. But songwriters rely on the Copyright Office to be our better angels.

Thank you for providing this opportunity to discuss these important issues.

Sincerely,
David C. Lowery

David Lowery’s Suggestions to the Copyright Office for Regulation of the Mechanical Licensing Collective Part 3

The US Copyright Office solicited comments from the public about the operations of the Mechanical Licensing Collective.  The first round of those comments (called “initial comments”) were due in November and the second round of those comments (which are called “reply comments” because they essentially comment on the initial comments) were due December 20.

All the comments focus on some central themes that seem to be on everyone’s mind which can be boiled down to oversight, oversight and more oversight.  While the DLC controls the MLC’s purse strings, the MLC has been given largely uncontrolled power over songwriters that needs to be checked by the government on behalf of the governed.

David Lowery did not file initial comments but as he notes, developments made him feel compelled to speak up in the reply comments.  We’re going to post his reply comments in four parts, and then we’ll post other commenters who we think made really good points (like CISAC and BIEM among others).  (If you want to skip ahead and read the entire comment, you can download it here.)  This is Part 3 of four parts.

Comments of David C. Lowery, Notice of Inquiry for Blanket License Implementation Regulations Issued by the United States Copyright Office Concerning the Orrin G. Hatch-Bob Goodlatte Music Modernization Act of 2018

MLC’s Reporting and Failure to Account

This section responds to the Office’s question regarding MLC’s Payments and Statements of Account.

As an overall comment, the MLC should be required to publicly post at least an aggregated version of all information it receives from DMPs supporting the calculation of royalties (transactions, TCC, deductions from gross, etc.). It will be impossible for songwriters to conduct a desktop audit of their statements with their accountants if key elements of the calculations are missing. Respectfully, the Copyright Office really needs to understand how many times we have seen this movie and how we definitely know how it ends.

This is the old hide the ball trick where royalty statements include everything except the one key piece of information needed to duplicate the reported calculations. Again, let’s not have meet the new boss, worse than the old boss. The Copyright Office has a golden opportunity to get this right—so please, please take heed. It will save a lot of time and litigation.

For example, the MLC is already saying things like this:

Accordingly, the MLC believes that any regulations obligating the MLC to distribute royalty reports and payments to copyright owners on a monthly basis should not require that such reports and payments be for a particular royalty period, which is at least in part outside of the MLC’s control.

Actually, this is wrong. If the MLC reports do not designate which period the payment corresponds to, there will be no way for songwriters to know what they are being paid for. This boils down to receiving a statement that says, here’s some money, or worse, no money for you. If there is no explanation of when the royalties were earned or last paid on a service-by-service basis, there is no way for songwriters to know if any service is current.

Plus, the Congress gave the MLC fearsome powers over DMPs and songwriters. If services are late, we expect MLC to chase them and chase them hard. They wanted this job, and now they have it. If songwriters have to wait until MLC get around to auditing trillions of transactions to know a service is late paying, unpaid money is as good as gone even for matched works.

As drafted, Title I places great emphasis on the user of the blanket license’s obligations to account and pay royalties but there is no corollary obligation for MLC. Indeed, it seems that the MLC is already backtracking on timely payments by lowering expectations of timely DMP payments. The DMP has a lot to lose if they are not timely with payments and statements.

There is virtually no downside for the MLC. I respectfully suggest that there be some teeth put into the MLC’s failure to account, for both the “known knowns” and the “known unknowns,” that tracks the penalties on the license user.

It does not appear that sufficient attention has been paid to the MMA’s major change in the compulsory licensing structure—the insertion of another gatekeeper into the stream of payments, a gatekeeper that has selected the former affiliate of one of its principal promoters with a known and well litigated history of failures for the very functions it is to take on with a Congressional mandate.

Incredibly, no one has included language addressing what happens if the MLC defaults. Auditing years after the fact is not going to get it done. In fact, the audit language in Title I is so antiquated that it could easily have come from a 1980s record deal. (Not to mention the meaningless and expensive requirement of a CPA to conduct royalty audits.) The audit language is simply not fit for purpose in a world of trillions of individual transactions rather than hundreds of millions of CDs. Songwriters forced to use the compulsory license need a much more immediate and much toothier remedy against the government’s MLC monopoly. In other words, the Music Modernization Act already needs to be modernized and the Copyright Office has a chance to do it—but the clock is ticking.

Language could be adopted in regulations that mirrors the statutory language for default by users of the blanket license, substituting the copyright owner for the MLC and the MLC for the digital music provider. For example:

“If the copyright owner does not receive the monthly payment and the monthly and annual statements of account from the MLC when due for reasons within the control of the MLC, the owner may give written notice to the MLC, unless the default is remedied not later than 30 days after the date on which the notice is sent, the MLC’s ability to administer the compulsory license for such copyright owner will be automatically terminated. “

Because the Copyright Office is charged with implementing regulations under a broad statutory grant, it seems that this loose end could be remedied in regulations without need of an amendment to Title I, particularly because the failure to include such a provision benefits those who controlled the pen for the drafting of Title I.

The Copyright Office should also take into account any failures to account when reviewing the re-designation of MLCI at the five year review mark.

Additional MLC Oversight: FOIA

Continuing the theme of sunlight as the best remedy, please consider the relationship of the Freedom of Information Act and the MLC. The Copyright Office complies with Freedom of Information Act requests (FOIA). The public interest would be served in having access to all correspondence and internal materials not subject to a FOIA exemption that relate to Title I of the Music Modernization Act as well as the “address unknown” NOI process that preceded and contributed to it.

Availability of these materials is particularly relevant given the lack of transparency required of MLC and the DLC (odd redactions in CRB filings for the administrative assessment is but one example) and the general mystery of why HFA was selected by MLC given the history of HFA with NMPA and the legislative process.

Rather than wait for a FOIA request for these materials, the Copyright Office should voluntarily make these materials available on Copyright.gov. I would recommend this process be repeated annually if not more frequently.

To be continued in Part 4