Copyright Office Issues NPRM to Correct MLC’s ‘Erroneous’ Dispute Policy on Post-Termination Blanket License Royalties

On October 25, the U.S. Copyright Office issued a notice of proposed rulemaking (NPRM) in the Federal Register to clarify the application of the derivative works exception to copyright termination rights within the context of blanket licenses administered under the Music Modernization Act (MMA). The Office is hoping to correct what it sees as a legally erroneous dispute resolution policy established by the Mechanical Licensing Collective (MLC), which administers the MMA’s blanket licenses to digital music providers, regarding the payment of royalties after songwriters exercise their termination rights to regain copyright ownership from music publishers.

MLC Dispute Policy Implicates Derivative Works Exception to Copyright Termination

Under U.S. copyright law, the creators of copyrighted works are able to exercise an option to terminate a grant of copyright; those rights are codified at 17 U.S.C. § 203 for works copyrighted in 1978 or after, and at 17 U.S.C. § 304 for works copyrighted prior to 1978. Termination rights were enacted in the Copyright Act of 1976 to ensure that creators whose works became very successful over time weren’t trapped into copyright licensing agreements with publishers that were drafted before the true value of the underlying work was realized. However, recognizing that there is a reason to encourage derivative works by copyright owners, both Sections 203 and 304 include exceptions to termination rights for derivative works that the publisher created during the period of the licensing agreement.

While the MMA, which created blanket licenses when it was enacted in 2018, did not address termination rights or the derivative works exception, the MLC implicated those legal provisions during the Copyright Office’s rulemaking to implement reporting requirements by digital music providers under the MMA. The MLC reasoned that the sound recording created by a music publisher for playback by digital music providers, including in formats playable by streaming services, was a derivative work. Under that interpretation, the MLC argued that royalties from blanket licenses should continue to be paid to the sound recording’s publisher even after termination if the blanket license was created prior to the copyright termination becoming effective.

While the Copyright Office’s rulemaking did require digital music providers to report the server fixation date and first distribution date of sound recordings distributed under blanket licenses, the Office noted that it was not using that data as a proxy for grant dates with respect to termination. While the Office indicated during rulemaking that there was no need for a default process for administering royalties following a termination, reasoning that letters of direction would keep the MLC informed of the proper royalty recipient, the MLC established such a process in 2021 in a dispute policy adopted by the collective. Attempting to prevent disputes about rights in termination from affecting blanket license royalties, the MLC’s dispute policy treated blanket licenses as subject to the derivative works exception. However, the Office’s NPRM notes that the MMA requires that the MLC’s dispute policies “shall not affect any legal or equitable rights or remedies available to any copyright owner or songwriter concerning ownership of, and entitlement to royalties for, a musical work.”

“While the application of the Exception can often be straight-forward (e.g., ‘a film made from a play could continue to be licensed for performance after the motion picture contract had been terminated but any remake rights covered by the contract would be cut off’), there are instances where the Exception’s operation is less clear.”

Mills Music Majority Acknowledges That Statutory Licenses Are Self-Executing

To the Office’s knowledge, there had been no courts dealing with the derivative works exception within the context of statutory licenses, such as the blanket licenses created by the MMA. In 1985, the Supreme Court decided Mills Music, Inc. v. Snyder in which the Court held that a music publisher could continue to receive royalty payments under a voluntary mechanical license granted to record companies, even after the songwriter terminated the grant of copyright over the underlying work to the publisher. The Court found that the “terms of the grant” for determining the scope of the derivative works exception required consideration of “the entire set of documents that created and defined each licensee’s right to prepare and distribute derivative works.”

Justice Byron Wright authored a dissent in Mills Music that was joined by Justices William J. Brennan Jr., Thurgood Marshall and Justice Harry Blackmun. Justice White argued that the majority’s interpretation of the derivative works exception was inconsistent with statutory mechanical licenses, royalties for which are “payable to the current owner of the copyright.” The Mills Music majority only addressed this argument by noting that a statutory license wasn’t at issue in the case, and in a footnote described those licenses as “self-executing” to distinguish them from the voluntary mechanical license at issue in the case. This distinction is also recognized in the Nimmer copyright treatise, which concludes that statutory licenses are not subject to the exception because they are created by law and not by a voluntary grant from the work’s creator.

Proposed Rule Directs Royalties to Copyright Owner at End of Monthly Reporting Period

In finding that the MMA’s blanket licenses are not subject to the derivative works exception, the Copyright Office’s NPRM notes that blanket licenses cannot be subject to the termination provisions of Sections 203 and 304 because they are not executed by authors or their heirs. Further, the Office found that the blanket licensing provisions of 17 U.S.C. § 115 are not premised on the idea that the sound recording derivatives obtained by digital music providers under the blanket license are derivative works themselves. “The Exception, as interpreted by Mills Music, should not be read as freezing other grants related to, but outside of, the direct chain of successive grants providing authority to utilize the sound recording derivative, such as the musical work licenses obtained by DMPs,” the NPRM reads.

Because the MMA is ambiguous on this area of termination rights, the Office’s proposed rule attempts to clarify that the appropriate payee for the digital music provider’s blanket license royalties is the current copyright owner, whether pre-termination or post-termination. The first part of the rule would establish that the appropriate payee is the copyright owner as of the end of the MMA’s monthly reporting period, although the Office indicated it was willing to consider whether another point of the reporting period would be more appropriate based on comments. It would also expressly state that no one can claim copyright to a musical work by virtue of a blanket license. The rule’s second part directs the MLC to distribute royalty payments according to the rule, unless the MLC receives a writing from the copyright owner directing the MLC to distribute royalties in some other manner.

Written comments on the NPRM must be received by the Copyright Office by midnight on November 25. Written reply comments will be accepted by the Office up to midnight on December 27.

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