The Music Modernization Act: Why It Matters

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INTRODUCTION

On 18th September 2018, the United States (“US”) Senate passed the Music Modernization Act (“MMA”) by unanimous consent. With unparalleled support among all factions of the music industry, the bill previously passed the House of Representatives in a 415-0 vote back in April. This is the first music licensing reform in the US in last 20 years. This clears the way for the bill to be sent to President Trump for signature and with it will come the most sweeping changes to archaic copyright laws.

Despite the complete digitization of the music industry in the US, until today the businesses operated under the same royalty laws established back in 1909! The MMA will update many of these laws and ensure that songwriters, producers and artists get a fair deal.

“As legendary band the ‘Grateful Dead’ once said in an iconic pre-1972 song, ‘what a long strange trip it’s been.’  It’s been an epic odyssey, and we’re thrilled to almost be at our destination,” Recording Industry Association of America President Mitch Glazier said. “For the modern U.S. Senate to unanimously pass a 185-page bill is a herculean feat, only achievable because of the grit, determination and mobilization of thousands of music creators across the nation.  The result is a bill that moves us toward a modern music licensing landscape better founded on fair market rates and fair pay for all.”

UMBRELLA LEGISLATION

The MMA is a bipartisan legislation that combines three separate pieces of legislation:

  • The Compensating Legacy Artists for their Songs, Service, and Important Contributions to Society (“CLASSICS”) Act – attempts to ensure artists receive royalties and are compensated for songs recorded before 1972. Currently, these songs are not protected by the US federal copyright law, but are instead governed by a jumble of state law and common-law court rulings.
  • The Allocation of Music Producers (“AMP”) Act – sets up a process allowing producers and engineers to collect royalties from CRM organisations such as SoundExchange when their works are played digitally or on satellite radio. Notably, this is the first time that producers and engineers, who play an indispensable role in the creation of sound recordings, have been mentioned in US copyright law.
  • The Music Modernization Act – updates licensing laws with regards to music streaming. The MMA revamps Section 115 to create a single licensing entity that will administer the mechanical reproduction rights for all digital distribution of songs and repeals Section 114(i) of the U.S. Copyright Act to allow courts to consider rates for sound recording royalties of a song while determining public performance royalty rates.

NOTABLE FEATURES OF THE MUSIC MODERNIZATION ACT

  • Mechanical Licensing Collective (“MLC”)

A mechanical license grants the right to reproduce and distribute the song (song = underlying lyric and composition) on CDs, records, tapes, ringtones, permanent digital downloads, interactive digital streaming like Spotify and Pandora. Mechanical royalties are a royalty paid to a songwriter or a publisher (in case the songwriter has assigned the publishing to a publisher) whenever a copy of any of their songs is created. For instance, when a record label presses a CD of a song, the owner of the copyright therein (songwriter/publisher – as the case may be) is due a mechanical royalty.

Because of the rise of streaming services, the majority of revenue in the music industry is generated by the likes of Spotify, Apple, Amazon and Pandora.

Thus, whenever a user plays a track on a streaming service, the service has to determine which composition underlies the sound recording and pay mechanical (reproduction) royalties to songwriters and music publishers for that composition (as the case may be).

Currently, Section 115 of the Copyright Act requires the U.S. Copyright Office to issue a ‘compulsory license’ to make and distribute further copies of a recorded musical work, once a copyright owner has recorded and distributed such a work to the U.S. public or permitted another to do so. In other words, if the song has already been recorded and commercially released, you can record and distribute it as long as you obtain a license to that affect and pay statutory royalties.

To acquire this license, the Digital Service Provider(s) (“DSP”) have to find out who the song rights holders are and send them a form called a Notice of Intention (NOI). In the event, a DSP can’t determine/identify the rightful owner; it must file the NOI with the U.S. Copyright Office. During the submission process, DSPs are able to stream and/or sell the music.

The trick is – Rather than identifying the rightful owners of the copyright and making due payments of royalties; DSPs would file large quantities of Notices of Intent (“NOI”) with the Copyright Office for works that aren’t registered with the Copyright Office, avoid payments in the meantime and still play music. About 45 million NOIs have been filed with the Copyright Office till date! This backlog has resulted in owners not getting compensated in a timely manner or, many a times, not getting compensated at all.

*Enter*Mechanical Licensing Collective

The MMA attempts to reform Section 115 of the US Copyright Act and to ensure that songwriters and publishers are compensated in a timely manner by (i) ending the bulk NOI process, (ii) creating a single Mechanical Licensing Collective and (iii) providing a publicly accessible database for song ownership information.

The MMA creates a single, centralized mechanical licensing entity called a Mechanical Licensing Collective (“MLC”) that will be run by representatives of major music labels, independent labels and self-publishing artists. Members of the MLC will receive a blanket license in exchange for their membership, allowing them not only to reproduce their songs in tangible formats (like CDs) but also in digital formats (like streaming), meaning that DSPs would no longer have to identify rights holders or send NOIs.

Remarkably, unlike performance royalty collection societies, such as ASCAP and BMI, which issue blanket licenses to broadcasters, restaurants and other entities that play songs of others (public performance), there has never been an organization in the US that issued blanket licenses for exercising the mechanical right.

Public Database – Songs and Owners of Copyright Therein

Currently, under the US copyright regime, there is no process to identify ownership of unmatched copyrighted works. DSPs are responsible for identifying the rights holders to each individual song in their catalogs. The DSPs are actually holding on to millions of dollars in unclaimed and unmatched royalties.

The MMA establishes a clear process through which copyright owners can claim ownership of songs and receive royalties. Rather than allowing the DSPs to keep the unclaimed, unmatched money indefinitely, MLC shall collect royalties for all songs played by DSPs according to transaction volumes, match recordings to underlying song, and disburse royalties to songwriters and music publishers. In return, DSPs would pay the operating costs of this newly established entity i.e. MLC.

The MLC will also be required to maintain a public database containing song ownership information to help songwriters and publishers identify which songs haven’t been properly attributed to them. Consequently, DSPs wouldn’t be liable for statutory damages, as they would no longer be responsible for identifying rights holders (provided the DSP has obtained a blanket license from the MLC).

Perhaps most importantly, the legislation enshrines into law the fact that a stream is both a performance and a mechanical. MMA forces DSPs to admit that the mechanical license is in fact owed for digital interactive streaming, a legal position which had been adopted by the DSPs in litigation.

Holding of Accrued Royalties

The MLC will hold unclaimed/unmatched royalties for 3 years while it tracks down copyright claimant/owner information. After 3 years, the MLC will distribute the unclaimed/unmatched royalties on a market-share basis. Currently, there is no requirement that songwriters receive royalties for unmatched works (where ownership in the underlying works has not been identified). However, Publishers are required under the new law to share at least 50% of all royalties for unmatched works with the songwriters.

Audit Rights

The MLC has the right to audit the books of the DSPs to ensure proper reporting and payment of royalties. On the other hand, the owners of the copyright will also be able to audit the books of MLC to ensure that accurate payments are being made.

  • Mechanical Royalty Rates

Mechanical royalties are due whenever a copy of a song is made i.e. reproduced (be it physical or digital).

At present, a statutory rate of royalty is determined by the Copyright Royalty Board and does not reflect market value. As a matter of fact, recorded music did not even exist at the time standard rates for compensation under the US Copyright Law were written. There is a logical need to update the out-dated standards.

The MMA replaces the current flawed legal standard with a standard that requires the courts to consider free-market conditions when determining royalty rates. Now, mechanical royalty rates would be determined on the basis of what a buyer and seller would negotiate in an open market.

  • Copyright Royalty Board Judging Will Change

Currently, Copyright Royalty Board judges are appointed for six-year terms. The two largest music performance rights organizations (PROs) in US, the American Society of Composers, Authors, and Publishers (ASCAP) and Broadcast Music Inc. (BMI), are assigned a single judge each who handles all of their royalty rate disputes; whereas others appearing before the Board are assigned one of the remaining judges.

Under the Music Modernization Act, no PRO will have an assigned judge. Instead, judges from the Southern District of New York will be assigned cases on a rotating basis – also known as a “wheel” approach.

This “wheel” approach ensures that the same single judge does not decide every single rate for the PROs and the judge will find the facts afresh for each case based on the record in that particular case, without impressions derived from prior cases.

  • Royalty Courts and Licensing Boards Will be Allowed to Consider More Evidence

Section 114 of the US Copyright Act is probably one of the most debated provisions of the Copyright Act. More particularly, Section 114(i) – that restricts the categories of evidence that the rate court judges can consider in deciding copyright royalty disputes.

For instance, currently rate court judges cannot consider evidence of sound recording royalty rates (i.e. how much gets paid when a record sells or a song is streamed) to set performance royalty rates (i.e. how much gets paid when the song is played at a restaurant or say, performed at a concert).

The MMA repeals Section 114(i), moving the music industry to a fairer system under which PROs and songwriters would have the opportunity to present evidence about the other facets of the music ecosystem to judges for their consideration, including sound recording royalties. This repeal thereby creates an opportunity for songwriters to obtain fairer rates for the public performances of their works.

  • CLASSICS (Compensating Legacy Artists for their Songs, Service and Important Contributions to Society) Act

The CLASSICS Act addresses the unpaid royalties on sound recordings prior to 1972. This is fixing a loophole, plain and simple. At present, DSPs are able to monetize on certain pre-1972 sound recordings without duly compensating the artists and copyright owners of these recordings.

The CLASSICS section of the MMA brings pre-1972 sound recordings fully under federal law, pre-empting all state laws governing the reproduction, distribution and digital public performance of these works. It effectively grants copyright owners and artists of sound recordings fixed between January 1, 1923 and February 15, 1972 protection against unauthorized digital performances.

Users of such sound recordings will need to give copyright owners a notice of such use and pay statutory royalties fixed for such use. Infringers will be liable for copyright infringement and consequently, subject to all remedies as set forth in the Copyright Act.

  • Orphan Works

The MMA also contains an “orphan works” style provision that allows for more use of oldie’ sound recordings even if the rights holder cannot be found.

By filing a notice with the US Copyright Office, anyone can use a pre-1972 recording for ‘non-commercial purposes’, after first checking that the recording isn’t in commercial use. The rights holder then has 90 days to object to the same. Even in the event the rights holder objects to the same; the potential user can still argue that the use is fair.

  • Access to Recordings – Public Domain

Under the MMA, recordings made before 1923 will exit from all copyright protection after a 3-year grace period. Recordings made from 1923 to 1956 will enter the public domain over the next several decades and recordings from 1957 onward will continue being protected under copyright until 2067, as before.

Honestly, while the copyright terms aren’t perfect, they are vastly improved from the MMA version passed by the House of Representatives, and avoid locking away pre-1972 sound recordings for many more decades than is necessary. Further, MMA guarantees that these old sound recordings will fully enter the public domain after the expiration of this newly established federal right.

  • AMP (Allocation for Musical Producers) Act

The MMA has also now added a section from the Act known as the AMP Act (Allocation for Musical Producers Act), providing for payment of statutory sound recording performance royalties to producers, mixers and sound engineers.

The inclusion of this section is significant because it recognises the contribution of producers and engineers for the first time. However, it is relatively uncontroversial because it does not create a new right; producers and engineers will continue to collect the royalties they were previously due. The only difference (that makes all the difference!) is that it will establish a legal procedure for them to collect their share of royalties directly from SoundExchange, rather than from the particular artist. SoundExchange is a non-profit collective rights management organisation designated to collect and distribute digital performance royalties for sound recordings (when sound recordings are used on satellite radio and online radio services like Pandora).

SoundExchange already allows artists to pay producers and engineers their share of royalties directly, by accepting “Letters of Direction” but the AMP Act would formalize this process. It would establish a procedure for producers and engineers of recordings made before 1995 to make an application to be paid royalties directly.

OBSERVATIONS AND CONCLUSION

The MMA is essentially a music business peace treaty, designed to fix some very long standing issues within it. It is the result of years of slow-moving compromise between digital companies that rely on music, deep-rooted music industry interests such as major and independent labels, publishers, performance rights organizations, songwriters, artists and the organizations that advocate for them.

On the face of it, the MMA may seem like bad news for DSPs, who shall now be subject to tight accountability, when it comes to licensing, reporting and royalty payments. However, it also provides a safe harbor to those DSPs who obtain a blanket license from MLC against any statutory liability arising out of any licensing violations that occurred in the past. This provision really seems to be the main motivation behind DSPs endorsing the MMA and agreeing to pay all costs in connection with the MLC – so that they can avoid multi-million dollar class action lawsuits in the future.

I think one of the drawbacks of the MMA is that, while the MLC will toil hard and collect royalties for vast number of streaming songs, it will work for only three years to match the royalties in those songs with the copyright owners. After three years, any unmatched and unclaimed royalties will be distributed among members of the MLC. This arrangement amounts to a form of ‘legal theft’; most likely to hit self-published and small independent songwriters.

However, all said and done – One cannot overlook the fact that the MMA is one of the most significant copyright reforms in the last few decades. It’s also the music industry’s second major victory this year after a controversial vote in the European Parliament that moved ahead a version of the EU Copyright Directive that includes provisions requiring digital platforms like YouTube, Google and Facebook to use filtering systems and actively block unlicensed copyrighted content shared by their users.

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