An Analysis of Title I and Title III of The Music Modernization Act, Part 1 of 2 (Guest Blog Post)
Guest Blog Post by Tyler Ochoa
On October 11, 2018, President Trump signed into law H.R. 1551, the Orrin G. Hatch-Bob Goodlatte Music Modernization Act, which became Public Law 115-264, 132 Stat. 3676. It contains three titles pertaining to copyright law. Title I is the Musical Works Modernization Act, or MWM Act, which revises the Section 115 compulsory license for musical works and establishes a new “mechanical licensing collective” to administer it. Title II is the Classics Protection and Access Act (or CPA Act, formerly known as the “Compensating Legacy Artists for their Songs, Service, and Important Contributions to Society Act,” or CLASSICS Act), which brings pre-1972 sound recordings mostly (but not completely) into the federal copyright system. Title III is the Allocation for Music Producers Act (or AMP Act), which amends the compulsory license for digital public performance rights for sound recordings to allocate a small portion of the proceeds to producers, mixers, and sound engineers.
This two-part blog post series will summarize the provisions of Title I, the Musical Works Modernization Act (or MWM Act) and Title III, the Allocation for Music Producers Act (or AMP Act). The provisions of Title II, the CPA Act, were summarized in a previous blog post.
To fully understand the changes made by the MWM Act, some familiarity with existing U.S. copyright law is needed. This blog post assumes that readers have already read or are familiar with the “Background” section of my previous blog post on Title II, the CPA Act. The remainder of this section describes the existing compulsory license for musical works. (Readers who are already intimately familiar with existing U.S. copyright law may skip to the next section.)
Musical works were first added to the Copyright Act in 1831. At the time, sound recording technology did not exist, and there was no public performance right, so the only way that a musical work copyright owner could make money was by reproducing and distributing copies (in the form of sheet music) of the copyrighted work. In 1897, the Copyright Act was amended to add an exclusive right of public performance in musical works. As is the case today, however, there was no exclusive right to control private performances of musical works.
The early 20th Century saw the introduction of the pianola, a player piano that used a roll of perforated paper to operate the keys of a piano keyboard. As a consequence, a legal question arose whether the copyright in a musical work also gave the copyright owner the exclusive right to reproduce and distributed perforated rolls of paper that would reproduce the musical work when used in conjunction with a player piano. In White-Smith Music Publishing Co. v. Apollo Co., 209 U.S. 1 (1908), the U.S. Supreme Court held that a “copy” of a musical work was “a written or printed record of it in intelligible notation.” 209 U.S. at 17. In other words, a copy must be “in a form which others can see and read.” Id. By contrast, “[t]hese perforated rolls are parts of a machine which, when duly applied and properly operated in connection with the mechanism to which they are adapted, produce musical tones in harmonious combination. But we cannot think that they are copies within the meaning of the copyright act.” 209 U.S. at 18.
The following year, in the 1909 Copyright Act, Congress reversed the result of the White-Smith case, extending to “compositions published and copyrighted after July 1, 1909” the exclusive right to reproduce the musical work “in any system of notation or any form of record in which the thought of an author may be recorded and from which it may be read or reproduced,” including “controlling the parts of instruments serving to reproduce mechanically the musical work.” 1909 Act §1(e). However, “as a condition of extending the copyright control to such mechanical reproductions,” the Act created a compulsory license. Once the copyright owner had exercised the right to make any such “mechanical reproductions,” anyone else could make mechanical reproductions without permission, “upon the payment to the copyright proprietor of a royalty of two cents on each such part manufactured.” Id.
Why did Congress choose to create a compulsory license for mechanical reproductions? At the time, the Aeolian Company, a maker of player pianos and piano rolls, had bought up the rights to make piano rolls of thousands of musical works. In an era in which there was great concern about monopolies (the Sherman Antitrust Act had been enacted in 1890, and the Clayton Antitrust Act would be enacted in 1914), Congress was concerned about the effect of having too many popular songs under the control of a single company. It created the compulsory license in order to promote competition in the market for piano rolls. Yet the “mechanical license” would turn out to be much more valuable when applied to the emerging technology of sound recording (in the form of phonograph records). The compulsory license persists today, because it has proven to be valuable in encouraging “covers,” or different recordings of the same musical work. Instead of having only one authorized recording of a musical work, the public potentially gets many different recordings of the same musical work. According to Kal Raustiala and Christopher Jon Sprigman, “the freedom to cover others’ songs gave birth to a vibrant culture of continuous musical revival, remaking and reinterpretation…. [B]ecause of Aeolian’s dominance of a now-defunct technology, we have a musical culture in America in which musicians are free to tweak songs they like.”
Another unintended consequence of the compulsory license was that the “mechanical reproductions” themselves were not eligible for copyright, despite the provision granting copyright to “all the writings of an author.” 1909 Act §4. Sound recordings would not be added to the federal Copyright Act until February 15, 1972. (Title II of the MMA, the Classics Protection and Access Act, creates new federal protection for pre-1972 sound recordings to correct this longstanding discrepancy.) In addition, as a result of White-Smith, the “mechanical reproductions” were not considered to be “copies” of the musical work. 17 U.S.C. §303(b). The legacy of White-Smith persists today in the otherwise inexplicable statutory distinction between “copies” and “phonorecords.” “Phonorecords” are defined as material objects in which only sounds are fixed; while “copies” are defined as material objects in which any other kind of work is fixed. 17 U.S.C. §101.
The compulsory license for musical works was carried forward in the Copyright Act of 1976. “When phonorecords of a nondramatic musical work have been distributed to the public in the United States under the authority of the copyright owner, any other person … may, by complying with the provisions of this section, obtain a compulsory license to make and distribute phonorecords of the work.” Former 17 U.S.C. §115(a)(1) (1976). The person simply has to notify the musical work copyright owner (before distributing any phonorecords, and before or within 30 days after making the phonorecords) and pay the statutory royalty, which is set by the Copyright Royalty Board, an administrative tribunal in the Copyright Office consisting of three Copyright Royalty Judges. (If the musical work copyright owner’s name and address are not disclosed in the public records of the Copyright Office, the person may file the notice with the Copyright Office instead.) In 1995, section 115 was amended to extend the compulsory license to so-called “digital phonorecord delivery,” or digital computer files reproduced and distributed by downloading the file over the Internet (such as Apple iTunes). (The current royalty rate for physical phonorecords and permanent downloads is 9.1 cents per copy, or 1.75 cents per minute per copy, whichever is larger. 37 C.F.R. §385.3(a).)
It is important to note that the compulsory license gives the licensee the right to make and distribute phonorecords of a new sound recording of a copyrighted musical work. The licensee cannot distribute phonorecords of an existing sound recording without also getting permission from the sound recording copyright owner. Moreover, in practice most producers of covers use a “voluntary” license provided by the Harry Fox Agency. The royalty payable for a Harry Fox license is the same (or lower) than the statutory royalty, but the terms and conditions for reporting and paying royalties are somewhat more convenient to administer than those set forth in the statute.
The Musical Works Modernization Act
The Musical Works Modernization Act (or MWM Act) retains most of the substantive provisions of the existing compulsory license, except that for digital phonorecord deliveries, the person seeking to use the compulsory license may no longer file the notice of intention with the Copyright Office. [17 U.S.C. §115(b)(2)(A)] The heart of the MWM Act, however, provides an alternative “blanket license” whereby a digital music provider can obtain a compulsory license for any “covered activities” [17 U.S.C. §115(d)(1)], defined as “making a digital phonorecord delivery of a musical work, including in the form of a permanent download, limited download, or interactive stream.” [17 U.S.C. §115(e)(7)] (The existing definition of “digital phonorecord delivery” in former 17 U.S.C. §115(d) expressly excluded non-interactive streaming; the new definition in 17 U.S.C. §115(e)(10) makes the inclusion of interactive streaming explicit.) The blanket license comes into effect on the “license availability date” [17 U.S.C. §115(d)(2)(B)], defined as January 1 following expiration of 2 years from the date of enactment. [17 U.S.C. §115(e)(15)] Since the date of enactment was October 11, 2018, the “license availability date” will be January 1, 2021. On or after that date, one can get a compulsory license for non-digital phonorecord delivery, or for digital phonorecord delivery for individual permanent downloads of musical works, through the same method as before that date [17 U.S.C. §115(b)(3)]; or one can get a blanket license for digital phonorecord delivery (including interactive streaming) through the new procedures in new subsection 115(d)(2). [17 U.S.C. §115(b)(2)] Failure to follow the latter procedures forecloses the possibility of a blanket license for a period of three years; while failure to obtain a compulsory license for individual works has the same consequences as under existing law, namely, foreclosing the possibility of a compulsory license for that work. [17 U.S.C. §115(b)(4)] For both types of licenses, the amended statute specifies for the first time that the Copyright Royalty Board “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.” [17 U.S.C. §115(c)(1)(F)]
As under existing law, “A person may obtain a compulsory license only if the primary purpose in making phonorecords of the musical work is to distribute them to the public for private use, including by means of digital phonorecord delivery.” [17 U.S.C. §115(a)(1)(A)] Nondramatic musical works eligible for a compulsory license fall into one of two categories: (i) those for which “phonorecords of such musical work have previously been distributed to the public in the United States under the authority of the copyright owner of the work, including by means of digital phonorecord delivery” (as under existing law), and (ii) those “for which clause (i) does not apply.” [17 U.S.C. §115(a)(1)(A)] Works in the second category are eligible only “in the case of a digital music provider seeking to make and distribute digital phonorecord deliveries of a sound recording embodying a musical work under a compulsory license for which clause (i) does not apply.” (This clause is terribly written, because grammatically it is unclear whether the qualifier “for which clause (i) does not apply” modifies the nouns “digital music provider,” “digital phonorecord deliveries,” “sound recording,” “musical work,” or “compulsory license.” In context, the best reading is that it modifies “musical work,” since section 115 is a limitation on the exclusive rights for musical works.) The second category has three additional conditions in two clauses: that (I) “the first fixation of such sound recording was made under the authority of the musical work copyright owner, [//] and the sound recording copyright owner has the authority of the musical work copyright owner to make and distribute digital phonorecord deliveries embodying such work to the public in the United States”; and (II) “the sound recording copyright owner [or an authorized distributor] … has authorized the digital music provider to make and distribute digital phonorecord deliveries of the sound recording to the public in the United States.” [17 U.S.C. §115(a)(1)(A)(ii)] In other words, even if phonorecords of a musical work have not been distributed to the public in the United States, a musical work is still eligible to have a compulsory license for digital phonorecord deliveries if the musical work copyright owner authorized a sound recording copyright owner to make digital phonorecord deliveries of the sound recording to the public in the United States, and the digital music provider has obtained the permission of the sound recording copyright owner or its agent.
According to the legislative history, clause (ii) applies “in the situation in which a digital music provider is the first person to make and distribute digital phonorecord deliveries (DPDs) of a sound recording embodying a musical work.” [Goodlatte Report of Oct. 19, 2018] It explains:
Under the current language of section 115(a)(1), a compulsory license is available to “any other person” after a sound recording embodying a musical work has been distributed to the public in the United States under the authority of the musical work copyright owner. The new language is intended to eliminate any ambiguity under existing law as to whether a digital music provider may obtain a compulsory license when the digital music provider is the first person to distribute digital phonorecord deliveries of such musical work. The new language makes clear that a digital music provider may obtain a compulsory license in those instances in which the digital music provider is the first person to make and distribute digital phonorecord deliveries of a sound recording embodying a musical work.
[Goodlatte Report, p. 1]
The Blanket License
The core of the MWM Act is the new blanket license. “A digital music provider … may … obtain a blanket license from copyright owners through the mechanical licensing collective to make and distribute digital phonorecord deliveries of musical works through one or more covered activities.” [17 U.S.C. §115(d)(1)(A)] Each of these terms is further defined in section 115(e): A “digital music provider” is a person who provides a service engaging in “covered activities,” and “has a direct contractual, subscription, or other economic relationship with end users of the service” or “exercises direct control over the provision of the service to end users”; “is able to fully report on any revenues and consideration generated by the service”; and “is able to fully report on usage of sound recordings of musical works by the service.” [17 U.S.C. §115(e)(8)] A “blanket license” is “a compulsory license to engage in covered activities.” [17 U.S.C. §115(e)(5)] The “mechanical licensing collective” is an entity designated by the Register of Copyrights (see next section). [17 U.S.C. §115(e)(18)] “Digital phonorecord delivery” means “each individual delivery of a phonorecord by digital transmission of a sound recording that results in a specifically identifiable reproduction by or for any transmission recipient of a phonorecord of that sound recording, regardless of whether the digital transmission is also a public performance of the sound recording or any musical work embodied therein, and includes a permanent download, a limited download, or an interactive stream.” [17 U.S.C. §115(e)(10)] Two types of digital transmissions are excluded from the definition: “a real-time, noninteractive subscription transmission of a sound recording where no reproduction of the sound recording or the musical work embodied therein is made “in order to make the sound recording audible,” and “the digital transmission of sounds accompanying a motion picture or other audiovisual work.” Since the RAM copies doctrine would render the first exclusion a nullity, one assumes that Congress was aware of, and has implicitly approved, the Second Circuit’s holding in Cartoon Network v. CSC Holdings, Inc., 536 F.3d 121 (2d Cir. 2008), that data embodied in a RAM “buffer” for only a “transitory duration” is not “fixed” and is therefore not a a “copy” or “reproduction” of the sound recording or musical work. This exclusion presumably was made because the noninteractive subscription transmission of a sound recording is already subject to the compulsory license for public performances of sound recordings in section 114 and the compulsory license for ephemeral reproductions in section 112(e). Finally, “covered activity” means “making a digital phonorecord delivery of a musical work, including in the form of a permanent download, limited download, or interactive stream.” [17 U.S.C. §115(e)(7)]
Except as provided in subsection (d)(1)(C), the blanket license “(i) covers all musical works … available for compulsory licensing under this section for purposes of engaging in covered activities,” and “(ii) includes the making and distribution of server, intermediate, archival, and incidental reproductions of musical works that are reasonable and necessary for the digital music provider to engage in covered activities.” [17 U.S.C. §115(d)(1)(B)]
Subsection (d)(1)(C) allows for voluntary licenses that trump the blanket license: “A voluntary license for covered activities entered into by or under the authority of 1 or more copyright owners and 1 or more digital music providers, or authority to make and distribute permanent downloads of a musical work obtained by a digital music provider from a sound recording copyright owner pursuant to an individual download license, shall be given effect in lieu of a blanket license … with respect to the musical works … covered by such voluntary license or individual download authority.” [17 U.S.C. §115(d)(1)(C)] If a voluntary license or individual download authority applies, then the statute specifies three conditions that also apply:
- (i) “the license authority provided under the blanket license shall exclude any musical works … subject to the voluntary license or individual download license.” This clause contains a significant ambiguity that may lead to litigation. Does it mean that if a digital music provider has a voluntary license or individual download authority for one or more musical works, the blanket license for that particular music provider excludes those musical works? Or does it mean that if a digital music provider has a voluntary license or individual download authority for one or more musical works, the blanket license for ALL digital music providers excludes those musical works? In context, the better-reasoned answer is the former; but one can expect that eventually, the copyright owner of a hit musical work who obtains a higher voluntary rate will sue to try to collect the higher rate from all digital musical providers.
- (ii) any “significant nonblanket licensee” must report its activities to the collective no later than 45 days after the end of each month. (For the definition of “significant nonblanket licensee,” see below.)
- (iii) “The rates and terms of any voluntary license shall be subject to the second sentence of clause (i) and clause (ii) of subsection (c)(2)(A) and paragraph (9)(C).” Subsection (c)(2)(A) provides (as under current law) that for certain specified licenses, the royalty rates fixed by the Copyright Royalty Board apply in lieu of voluntary negotiated rates. Subsection (d)(9)(C) says that “[a] voluntary license for a covered activity in effect on the license availability date [January 1, 2021] will remain in effect unless and until” it expires, or the parties agree to amend or terminate it.
To obtain a blanket license, a digital music provider must “submit a notice of license to the mechanical licensing collective that specifies the particular covered activities in which the digital music provider seeks to engage.” [17 U.S.C. §115(d)(2)(A)] The Register of Copyrights will issue regulations specifying the form and contents of the notice. Unless the notice is rejected in writing within 30 calendar days of receipt, the blanket license shall become effective as of the date the notice was sent (but not earlier than January 1, 2021). [17 U.S.C. §115(d)(2)(A)(ii), (d)(2)(B).] A notice may be rejected by the collective only if the notice does not meet the statutory or regulatory requirements, or if the provider had a blanket license terminated for a default within three years before the collective receives the notice. [17 U.S.C. §115(d)(2)(A)(iii)] If a notice is rejected for the former reason, the grounds must be specified, and the provider has 30 calendar days to cure the deficiency and submit an amended notice. [17 U.S.C. §115(d)(2)(A)(iv)] If the provider believes a blanket license was improperly rejected, it may seek review in a U.S. District Court. [17 U.S.C. §115(d)(2)(A)(v)]
In the absence of a voluntary agreement, the parties may petition the Copyright Royalty Board to set reasonable rates and terms for the blanket license “that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller.” [17 U.S.C. §115(c)(1)(D)-(F)] Neither the mechanical licensing collective nor the digital licensee coordinator may participate, except that each may gather and provide financial and other information for use in such proceedings. [17 U.S.C. §115(d)(8)(A)] The Board may also establish late fees for payment of royalties. [17 U.S.C. §115(d)(8)(B)] “For any covered activity for which no rate or terms have [yet] been established,” the collective and a digital music provider may agree to an interim rate and terms, which shall be nonprecedential and may not be used in a rate-setting proceeding. [17 U.S.C. §115(d)(8)(C)] Once the Board establishes a rate and terms, it supersedes the interim rate and terms and applies retroactively, and any overpayment or underpayment under the interim rate must be made within 90 days of the effective date. [17 U.S.C. §115(d)(8)(D)]
“A digital music provider that obtains and complies with the terms of a valid blanket license … shall not be subject to an action for infringement of” the reproduction and distribution rights for the use of a musical work “to engage in covered activities authorized by such license.” [17 U.S.C. §115(d)(1)(D)] This provision is subject to subsection (d)(4)(E), which prescribes what happens in the event that a digital music provider defaults. (See below.)
The blanket license applies solely to the reproduction and distribution of musical works, and does not extend to the right of public performance. [17 U.S.C. § 115(d)(13)(A),(B)] Specifically, for interactive streaming, a digital music provider must still get a license to publicly perform the musical works through a performing rights organization (such as ASCAP or BMI), and a negotiated license to publicly perform the sound recording by means of digital audio transmission under section 114(d)(3). (For non-interactive streaming, section 115 does not apply; instead, section 112(e) covers the ephemeral reproductions. The provider must still get a public performance license for the musical work through a performing rights organization, while section 114(d)(2) provides a compulsory license for the public performance of the sound recording by means of digital audio transmission.)
The Mechanical Licensing Collective
The Act authorizes the Copyright Office to designate a new “Mechanical Licensing Collective” to administer the new blanket license, and specifies in great detail how the collective should be formed and governed. [17 U.S.C. §115(d)(3)] The Collective shall be a stand-alone nonprofit entity, endorsed and supported by “the greatest percentage of the licensor market” for musical works “over the preceding 3 full calendar years” (“preceding” what is not specified; the best answer is preceding the designation date), which as a practical matter means endorsed by the “Big 3” music publishers: Sony/ATV, Warner/Chappell, and Universal Music Publishing Group; and it must demonstrate it has the administrative and technological capability to perform its required functions. [17 U.S.C. §115(d)(3)(A)]
The Collective shall be governed by a Board of Directors consisting of 14 voting members and 3 non-voting members. 10 voting members represent music publishers, “none of which may be owned by, or under common control with, any other board member”; the other four voting members will be professional songwriters who have retained their exclusive rights. The three non-voting members represent a nonprofit trade association of music publishers (likely NMPA, the National Music Publishers Association); the digital licensee coordinator, or a nonprofit trade association of digital licensees (to be created); and a nationally recognized nonprofit trade association that advocates for songwriters (likely SGA, the Songwriters Guild of America). [17 U.S.C. §115(d)(3)(D)(i)] The Collective’s bylaws, directors’ meetings, advisory committee (split evenly between songwriters and digital music providers), “unclaimed royalty oversight committee” (split evenly between musical work copyright owners and songwriters), “dispute resolution committee” (ditto), annual reports, independent officers (cannot be an employee or agent of any entity represented on the board), and audits are further specified. [17 U.S.C. §115(d)(3)(D)(ii)-(ix), respectively] “If the Register is unable to identify an entity that fulfills each of the qualifications …, the Register shall designate the entity that most nearly fulfills such qualifications …” [17 U.S.C. §115(d)(3)(B)(iii)]
As required, the Copyright Office has already solicited public comments regarding the initial designation, which are due by March 21, 2019, with reply comments due by April 22, 2019. 83 Fed. Reg. 65747 (Dec. 21, 2018). The Office must make the initial designation no later than 270 days after enactment, or July 8, 2019. [17 U.S.C. §115(d)(3)(B)(i)] In January 2024, and each five years thereafter, the Office must publish a notice inquiring whether the existing designation should be continued, or a new designation should be made. [17 U.S.C. §115(d)(3)(B)(ii)] Such designation will become effective on the first day of a month not less than 6 months and not more than 9 months after the notice (first day of August, September, or October). [17 U.S.C. §115(d)(3)(B)(ii)(I)] If a new entity is designated, the Office shall “adopt regulations to govern the transfer of licenses, funds, records, data, and administrative responsibilities” from the existing Collective to the new entity. [17 U.S.C. §115(d)(3)(B)(ii)(II)]
The Music Licensing Collective is authorized to perform the following thirteen functions: (I) offer and administer blanket licenses; (II) collect and distribute royalties; (III) identify and locate the copyright owners of musical works; (IV) maintain the musical works database (see below); (V) administer a process for claiming ownership of musical work copyrights, and for distributing unclaimed royalties for such works; (VI) collect administrative assessments from digital music providers and significant nonblanket licensees; (VII) invest in resources and arrange for services to support its activities; (VIII) enforce rights and obligations, including filing proofs of claims in bankruptcy; (IX) initiate and participate in proceedings before the Copyright Royalty Board regarding the “administrative assessment” (see below); (X) initiate and participate in proceedings before the Copyright Office; (XI) gather and provide documentation for use in proceedings before the Copyright Royalty Board; (XII) maintain records and respond to audits; and (XIII) any other activities that are “necessary or appropriate” to fulfill its responsibilities. [17 U.S.C. §115(d)(3)(C)(i)] The Collective may only issue and administer “blanket licenses for reproduction or distribution rights in musical works for covered activities” that comply with subsection 115(d)(1). [17 U.S.C. §115(d)(3)(C)(ii)] For a reasonable fee, the Collective may also administer voluntary licenses or individual download licenses “for reproduction or distribution rights in musical works for covered activities” granted by copyright owners. [17 U.S.C. §115(d)(3)(C)(iii)] Except for proceedings before the Copyright Office and the Copyright Royalty Board, the Collective is prohibited from engaging in any other government lobbying activities (although the entities that the Board members represent, of course, are not prohibited).
The Collective’s costs shall be funded by digital music providers and significant nonblanket licensees, either in the form of voluntary contributions to be “determined by private negotiation and agreement” with copyright owners, or in the form of an “administrative assessment” to be determined by the Copyright Royalty Board. [17 U.S.C. §115(d)(7)(A),(B)] The administrative assessment shall be “an amount that is calculated to defray the reasonable collective total costs,” after subtracting any voluntary contributions. It shall be based on usage of musical works for covered activities, and may be in the form of a percentage of royalties due for such usage, subject to a minimum fee. [17 U.S.C. §115(d)(7)(D)(ii)] The Board must commence the initial assessment proceeding no later than July 8, 2019, and must publish its determination within one year after commencement, to take effect on January 1, 2021. [17 U.S.C. §115(d)(7)(D)(iii)] At least one year after publication of the most recent assessment, any interested party may file a petition to adjust the assessment in May of any year. The Board must then commence the adjustment proceeding in June of that year, and publish its adjusted assessment in June of the following year, to take effect on the following January 1. [17 U.S.C. §115(d)(7)(D)(iv)] The Board may approve and adopt a negotiated agreement between the Collective and the digital licensee coordinator, or the Board has discretion to reject any such agreement for good cause. [17 U.S.C. §115(d)(7)(D)(v)] The assessment proceeding is subject to judicial review in the U.S. Court of Appeals for the D.C. Circuit. [17 U.S.C. §115(d)(7)(D)(vii)]
[check out Part 2 of this blog post series]