Tuesday, May 8, 2018

What you need to know about the MLC, a New Copyright Licensing Organization

Written by John Miranda — The Music Modernization Act (“MMA”) was approved in the House of Representatives on Wednesday, April 25th, receiving broad bipartisan support, with 415 votes in its favor. Due to its near universal support in Washington, it is poised to pass the Senate and be signed into law by the President.

The MMA contains many important provisions which will alter the music copyright royalty landscape, including a modification of the judge assignment system for ASCAP and BMI’s rate proceedings in the federal court of the Southern District of New York, as well as the types of evidence and legal standards that judges are allowed to consider in copyright royalty rate proceedings.

However, the MMA’s biggest impact will come from the establishment of the Mechanical Licensing Collective (“MLC”).

This is a new copyright licensing organization which will create and maintain the world’s most thorough database of music composition copyrights and their owners, collect mechanical royalties from digital music streaming services, and transmit those royalties to copyright holders based on the ownership claims set forth in the database.

Specifically, streaming services will pay mechanical royalties to the MLC based on the number of streams each song has racked up. Then, it is up to various music composition copyright holders to enter claims on their songs in order to receive their proper royalty payments.

It is important to note that the MLC concerns only music composition “mechanical royalties”.

It will not collect royalties related to sound recordings, a separate copyright which is negotiated privately between record labels and streaming services. Additionally, it does not collect royalties for the public performance of music compositions; those royalties will still be collected by performance rights organizations such as ASCAP and BMI.

The MLC will collect royalties owed to the owners of “music composition” copyrights, i.e., the rights in the underlying songs themselves, not specific recordings or renditions of the songs, whenever such songs are “reproduced” via a digital stream or download.

At the moment, digital streaming services file a Notice of Intention (“NOI”) with the Copyright Office whenever they stream a song and, for whatever reason, cannot track down the copyright owner. This was initially considered more efficient than forcing music users to track down unknown copyright holders. However, with the advent of digital music services which stream millions of songs, the Copyright Office has been inundated with countless NOI filings, all of which represent mechanical royalty payments that song owners will never see.

The MLC takes care of this by providing a “blanket mechanical license” for digital streaming of music compositions, a license which is likely to result in significantly more payments, which in turn should end up in the hands of the proper copyright owner, due to the MLC’s master database. To the extent they still exist, this will also pertain to digital download services, such as old school iTunes.

It is also important to note that the MLC pertains only to “interactive” streaming services, such as Spotify, not “non-interactive” internet radio services such as Pandora, since the non-interactive services do not owe the mechanical royalties at issue.

How will the MLC help digital streaming services and music composition copyright holders?

The MLC basically ensures that streaming services will pay more mechanical royalties, royalties which they are currently able to avoid paying due to the NOI procedure with the Copyright Office.

So how does the MMA help streaming services?

To start, it’s important to remember that mechanical licenses have always caused headaches in the streaming world, since the licenses are “compulsory,” in that explicit permission is not necessary so streaming services do not have to negotiate directly with music composition copyright holders. Instead, they send an NOI to the owner of the copyright and pay the mechanical royalty through an organization such as Harry Fox Agency or Music Reports.

When they can’t find the copyright owner, they go the route of submitting an NOI to the Copyright Office, paying nothing at all. This issue never arose with sound recording copyrights, since streaming services must get direct permission from record labels and recording copyright owners to use those works. Accordingly, there was never any mystery surrounding the owner of such copyrights — if the owner could not be found, then the streaming service could not get permission to use the song. But the record labels often provided the streaming services with little information about who owned the songs underlying their recordings.

Furthermore, unlike performance royalty collection societies, such as ASCAP and BMI, which issue blanket licenses to broadcasters, restaurants, and other entities which play the music compositions of others, there has never been an organization which provides blanket licenses for the mechanical copyright.

So a lot of mechanical royalties have gone unpaid, with streaming services unable to locate their proper recipients. This oversight has resulted in massive class action litigation against streaming services, lawsuits which cost millions in legal fees in a best case scenario, and could potentially bankrupt the digital streaming industry in a worst case scenario (i.e., a negative verdict at trial).

Well, the digital music services no longer have to worry about the constant lawsuits and potential sky-high class action liability. The MMA forces streaming services to concede that the mechanical royalty is in fact owed for music streams, a legal point which has been litigated in the aforementioned proceedings, but allows the services to completely escape liability as long as they pay for the MLC’s blanket license and accurately report their music usage to the MLC.

The main way that the MLC helps the owners of music composition copyrights is by increasing royalty payments, since the NOI route will no longer serve as an easy escape hatch for streaming services.

Additionally, copyright owners will be able to stake claims to their songs via the MLC’s grand music ownership database. According to the bill, the database will be free, public, and searchable, hopefully resulting in more accurate matching for songwriters. It will also break down ownership shares of song copyrights, making the database even more informative, although it will likely be a battleground in future disputes between songwriters, producers, and publishers.

Finally, one of the MMA’s other provisions changes the standard for setting mechanical royalty rates, which are set by the federal judiciary, currently standing at around 9 cents per reproduction of a song.

The MMA changes the royalty rate setting standard to “willing buyer, willing seller,” which is likely to make the rate higher. All around, music composition copyright holders are going to see paychecks in the mail more frequently and in larger amounts, thanks to the MLC.

What will the MLC look like?

The MLC’s primary function will be to take a gross payment from the streaming services based on a Monthly Usage Report, and distribute it to the proper copyright owners of the song, usually split 50/50 between music publisher and songwriter. The organization will be an “independent not-for-profit organization” selected by the Copyright Office, much like SoundExchange, the MLC’s analogue in the world of sound recording performance copyrights for non-interactive internet radio services.

It is possible that a pre-existing organization such as Harry Fox Agency, Google’s RightsFlow, or Music Reports, will handle the duties for the Copyright Office, but the Office could just as soon charter their own organization, like SoundExchange. The MLC will be subject to administrative review every five years, and will be funded by administrate fees paid by the digital music services. The MLC’s governing board will be populated exclusively by music publishing and songwriting representatives, but there will be an “advisory committee” split 50/50 between representatives from the worlds of digital streaming.

Considering that the MLC has not yet been established, but the MMA’s most important provisions are all predicated on the existence of this institution, all of the music industry’s major constituencies have questions about the MLC’s finer details.

And most of these questions are yet to be answered by the Copyright Office. However, despite the unresolved ambiguities, the passage of the MMA will hopefully result in less legal uncertainty for both music services and copyright holders in the digital streaming age.

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