United States: A Positive Shift: The Music Modernization Act And Gaining Better Access To Royalty Payments

Signed into law on October 11, 2018 the Orrin G. Hatch–Bob Goodlatte Music Modernization Act (“MMA”) was enacted “to address many of the ancient inequities in our copyright laws that stand between music creators and fair compensation.”¹ The bipartisan bill finally recognized the need for the law to catch up with the music industry in the digital age. Recording Industry Association of America President Mitch Glazier stated that “[t]he public policy rationale for the bill's reforms was demonstrable,” adding that “[t]he gaps or inequities in the laws we were seeking to change were obvious, glaring and indefensible.”²

Title I of the MMA was designed to better improve licensing and royalty payments for songwriters. Before the MMA, digital music providers (“DMPs”) such as Spotify, Apple Music, and Tidal served a notice of intention to obtain a compulsory song-by-song license to either the copyright owner or to the Copyright Office (the “Office”) if the owner was not identified. Instead of going through this process, the MMA now authorizes a blanket licensing system for DMPs to make and distribute downloads or interactive streams of music. These blanket licenses will be administered by a mechanical licensing collective (“MLC”). The purpose of the MLC is to “receive notices and reports from DMPs, collect and distribute royalties, and identify musical works and their owners for payment.”³ A digital licensing coordinator (“DLC”) was designated by the Office to represent licensees (the DMPs) in royalty proceedings.

Since the blanket licenses cannot be given until January 1, 2021, the MMA includes rules and regulations for DMPs during this “transition” period. During this period, DMPs seeking to obtain a compulsory license must continue to do so on a song-by-song basis and DMPs must also serve a notice of intention if the copyright owner is known. If the copyright owner is not known, however, the DMPs do not need to obtain a compulsory license as long as the DMPs, using good faith and commercially reasonable efforts, continue to search for the identity of the copyright owner. If the owner is still unknown on the first day of 2021, then the digital music provider must transfer the royalties to the MLC. This process is referred to by the Office as the limited liability exception.

In order to be eligible for the limitation on liability, one of three scenarios must occur. First, if the DMPs are successful in identifying and locating the copyright owner, they must provide statements of account and pay the royalties to the copyright owner. In the second and third scenarios, the DMPs are not able to locate and identify the copyright owner by the end of the calendar month in which the work was first used. If this is the case, the DMPs must accrue and hold the royalties. If the copyright owner is identified before the blanket license is available, the DMPs must pay the copyright owner the royalties. If the copyright owner is still not identified by January 1, 2021, the DMPs must transfer the royalties to the MLC along with a cumulative statement of account that includes information that would have been provided to the owner had the DMPs knew of the identity of the owner.⁴

When the transition period rule was publicized, the Office stated that “[t]he intent of the legislation does not signal to the [O]ffice that it should be overhauling its existing regulations during the transition period before the blanket license becomes available.”⁵ When the Office provided the opportunity for public comments, both the MLC and DLC responded.

The MLC recommended that the cumulative statements of account provided by the DMPs should be delivered at the end of the transition period instead of the pre-existing monthly statements. The MLC also proposed that the statements include additional information including per-play allocations, information about matched shares of a musical work where unmatched shares for the work are reported, information about any applicable earned interest, and information about any claimed or applied deductions or adjustments to the aggregate accrued royalties payable. The DLC claimed that the Office is restricted and cannot require DMPs to provide additional information since it is impractical for DMPs to provide such information and doing so went against the requirements of the MMA. The Office agreed with the MLC, stating that it is “necessary and appropriate to require DMPs to provide additional information to aid the MLC in fulfilling its statutory duty to identify and locate the copyright owners of unmatched works and pay the royalties due to them.”⁶

The DLC proposed that DMPs should not be required to accrue any royalties that are required to be paid to copyright owners pursuant to any agreements entered into prior to January 1, 2021. The DLC argued that because some DMPs will be required to pay some amount of accrued unmatched royalties to publishers with whom they have direct deals, it will create a conflict between the pre-existing agreement and the MMA. The MLC countered the DLC's proposal, claiming that it conflicted with the MMA's requirement that all royalties of the unmatched work be transferred to the MLC. The Office stated that this issue may be best resolved by determining whether a given agreement constitutes a valid license; if the work is matched, then it does not need to be reported to the MLC. Additionally, the Office stated the issue may be better resolved by the relevant parties looking at the language of the agreement rather than a blanket rule given by the Office. While admitting that the issue is nuanced and complicated, the Office declined the DLC's proposal.

The last day for the public to provide comments on the proposed changes to the transition period transfer and reporting of royalties was on August 17, 2020. GRSM will provide relevant updates regarding the Office's decision.

About the author: Ross Kirkbaumer is an associate in the Seattle office of Gordon Rees Scully Mansukhani and a member of the firm's Intellectual Property Practice Group. With a background in intellectual property enforcement, Mr. Kirkbaumer's interests include copyright and trademark litigation as well as anti-counterfeiting enforcement.

Footnotes

1 House Introduces Comprehensive Music Licensing Reform Legislation, Sound Exchange  https://www.soundexchange.com/news/house-introduces-comprehensive-music-licensing-reform-legislation/.

2 Mitch Glazier, The Music Modernization Act: An Industry Speaking With One Voice (Guest Column), Variety  https://variety.com/2018/biz/news/music-modernization-act-guest-post-1202957944/.

3 Musical Works Modernization Act, Copyright.gov https://www.copyright.gov/music-modernization/115/.

4 Music Modernization Act Transition Period Transfer and Reporting of Royalties to the Mechanical Licensing Collective, 85 Fed. Reg. 43,518 (July 17, 2020).

5 Id.

6 Id. at 43,519.

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