Mechanical Licensing Collective’s $424.4 Million Unmatched Royalty Collection Highlights Music Modernization Act’s Limited Liability Compromise

On February 16, the Mechanical Licensing Collective (MLC) – a nonprofit organization designated by the U.S. Copyright Office to administer blanket mechanical licenses to eligible streaming and download services in the United States –announced that it had received a total of $424.4 million in unmatched royalties accrued by 20 digital service providers (DSPs), including Spotify and Apple Music, during a three-year transition period under the terms of the Music Modernization Act (MMA). The transfer of unmatched royalties enables these DSPs to qualify for limited liability provisions under the MMA. At the same time, usage data submitted by DSPs associated with the accrued unmatched royalties is expected to help the MLC identify copyright owners for distributing royalty payments, the first of which are expected to be distributed this April.

Qualifying under the MMA’s Limited Liability for Infringement Actions

Under Section 102(d)(10) of the MMA, DSPs offering streaming music services could qualify for limited liability provisions for unlicensed uses of songs prior to the availability of blanket licenses that were enacted by the MMA. If copyright owners commenced a copyright infringement action against a DSP qualifying for limited liability provisions of the MMA on or after January 1, 2018, then recovery for those copyright owners is limited to compulsory royalties in proceedings before the Copyright Royalty Board (CRB). Determinations of compulsory royalties in such cases are made by CRB judges pursuant to Section 102(c)(1)(C)—(F) of the MMA, subsection (F) in particular stating that “Copyright Royalty Judges shall establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller” with CRB decisions based upon “economic, competitive, and programming information presented by the parties,” including whether the licensee’s use either promotes record sales or hinders a copyright owner’s revenue streams, as well as the relative creative contribution in the musical work and the technological contributions in making the streaming service available to the public.

To qualify for the limited liability provisions under MMA Section 102(d)(10), DSPs are required to engage in “good-faith, commercially reasonable efforts” to locate copyright owners of musical works that are made available to the public through “covered activities,” which is defined by the MMA to include making a digital phonograph delivery of a musical work in the form of a permanent download, a limited download, or an interactive stream. Good-faith efforts by DSPs were to include the collection of information related to the sound recording accruing unmatched royalties, including sound recording name, featured artist, copyright owner, producer, publisher, songwriter, percentage ownership shares and other information commonly used in the music industry “to identify sound recordings and match them to the musical works they embody.” If DSPs located copyright owners, the MMA’s good-faith provisions required them to provide those owners with royalties and statements of account related to the musical work. For DSPs that still held unmatched royalties within 45 days of the license availability date on January 1 of this year, the MMA required transfer of those unmatched royalties and statements of account to the MLC, which is tasked with locating those copyright owners for the unmatched works and distributing these royalties.

This new legal framework did not preclude copyright owners from pursuing licensing activities with DSPs during the transition period leading up to the availability of blanket licenses under the MMA, but a recent blog post by National Music Publishers’ Association President David Israelite helps clarify why the delicate compromise on unmatched royalties was struck. While Israelite notes that copyright owners and music publishers would have been very successful in “suing [DSPs] into oblivion,” the framework under the MMA enables a pathway for copyright owners to take action on collecting unmatched royalties in such a way that “remed[ies] the past and help[s] shore up the streaming economy for the future.”

The greatest amounts of unmatched royalties transferred to the MLC came from Apple Music ($163.3 million) and Spotify ($152.2 million), both well ahead of Amazon Music ($42.7 million) and Google Play Music/Youtube ($32.9 million). The unmatched royalties transferred to the MLC largely tracks monthly U.S. user base statistics for streaming music providers, as Apple Music and Spotify top the monthly user base rankings as well. However, it does suggest that companies like Pandora, which ranks third in user base but only had $12.4 million in unmatched royalties, do a better job of locating copyright owners for distributing royalties than companies like Amazon, which ranked fifth in September 2019, with 16.5 million monthly users, but transferred nearly three times the amount of unmatched royalties to the MLC as Pandora.

Striking Compromise

The limited liability provisions of the MMA were essential to securing the compromise necessary for Congress to pass the bill into law, as is reflected by a final rule issued January 11 by the U.S. Copyright Office and the Library of Congress regarding DSP obligations to transfer and report accrued royalties for unmatched musical works:

Congress believed that the liability limitation… would ‘ensure that more artist royalties will be paid than otherwise would be the case through continual litigation’ and also viewed this provision as a ‘key component that was necessary’ to ensure support for legislative change.

The importance of this compromise in promoting access to unmatched royalties doubtlessly led the Copyright Office to adopt a final rule on limited liability eligibility that credits the good-faith data reporting efforts of DSPs while eschewing more stringent methods. For example, the Copyright Office incorporated suggestions from the MLC and the Digital Licensee Coordinator (DLC), another nonprofit entity created by the MMA and responsible for coordinating the activities of digital licensees receiving blanket licenses, that DSPs should not be responsible for submitting supplemental metadata regarding partial share copyright owners who have been identified and paid to qualify for limited liability.

Further, the Copyright Office rejected a joint proposal from the MLC and DLC to create an enforcement mechanism under the agency’s Section 115(b) authority allowing copyright owners to bring an action for injunctive relief to obtain such metadata. The agency cited several reasons for this rejection including the late stage of the rulemaking process at which the proposal was made, its significant departure from historical practice and MMA provisions regarding de novo district court review that give significant authority to the MLC for enforcing copyright owner rights and DSP regulatory obligations.

In a statement on the the transfer of royalties to the MLC, the Artist Rights Alliance said it’s “a good start”, but expressed concern about possible gaming of the system:

There’s a lot of work still to be done to get that money to the songwriters that earned it…. In the months ahead we look forward to engaging further with the Office about efforts by publishers who have already been paid for historical usages via settlement agreements to seek double payment out of these new funds. As we have told the Office in our prior filings, the major publishers that already settled with digital services and received payment from them should not be allowed to claim a further share of the monies transferred to The MLC.

Other MMA News

While the $424.4 million unmatched royalty transfer to the MLC generated many headlines, there is a lot of activity on MMA implementation that has been underway in recent months. Last December, the DLC and the MLC filed a joint motion in CRB administrative proceedings regarding the initial administrative assessment to fund the MLC, which is fully supported by DSPs with funds separate from unmatched royalties showing good cause to modify the terms of the assessment to better accommodate the financial situations of smaller digital music businesses. The initial assessment funding $33.5 million in MLC startup costs collects either $5,000 or $60,000 from each DSP based on an annual unique song recordings count, but the recent joint proposal advocates for a more gradual payment allocation that reduces annual fees for smaller digital music providers. At the Copyright Office, that agency has recently issued an interim rule on the treatment of confidential information collected in the records of the MLC and the DLC and also announced a series of public roundtables as part of its study to develop best practices in identifying and locating copyright owners to distribute unmatched royalties.

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