By: Henry Gradstein
Unclaimed mechanical royalties should be maintained on deposit for as long as it takes to be distributed to their rightful copyright owners.
At the end of last year, the Music Modernization Act (MMA) was introduced on Capitol Hill. Among other things, the MMA protects digital music services from copyright infringement suits by establishing a blanket licensing system whereby digital music services can obtain a blanket license to play all U.S. copyrighted songs, from a statutorily created entity to be called the Mechanical Licensing Collective (MLC).
The digital music services will be relieved of the work of identifying the songs embodied in the sound recordings they stream, determining who owns them, obtaining either direct or compulsory licenses from the owners, and accounting for and paying royalties to the owners. They will now need only to provide monthly usage reports of the sound recordings they streamed to the MLC, along with payment of total gross mechanical royalties, and the MLC will supposedly do the rest.
The problem occurs if this new entity, the MLC, cannot do the rest. If the MLC cannot match the sound recording to a composition, or the MLC cannot identify who owns the composition, or the owner does not register with the MLC, mechanical royalties will be accrued and held for three years in a “Black Box” — an interest bearing account. The rightful owners will have a chance to search through a database of unclaimed songs to claim their copyrights, but if after three years the rightful owners don’t claim their copyrights and the accompanying mechanical royalties, then unclaimed royalties would be distributed to all of the other music publishers based on their market share.
It is debatable whether digital music providers should be relieved of their obligation to identify and license songs before exploiting them, and whether the MLC will be a more effective mechanism for identifying and paying copyright owners than digital music services relying on market driven solutions to avoid infringement actions. But there should be no debate that it would be unconscionable to redistribute unclaimed royalties to non-owners of the unmatched songs, especially based on market share, which could result in an unearned windfall to major music publishers like Sony, Universal, Warner or BMG, who are the least likely to own unmatched songs.
In order to stream a record, digital music providers are required to obtain two licenses: one from the owner of the sound recording and another from the owner of the song embodied in the record. For example, Bob Dylan wrote the song “All Along the Watchtower.” If a digital music provider wants to stream the Dylan, Jimi Hendrix or any other version of “All Along the Watchtower,” it must obtain a license from each of the record labels that owns those versions of the recording and a second license from Dylan (or the entity that represents him called a “Publisher”) for the song. The royalties paid to use that song are called “mechanical royalties,” going back to the time when songs were first “mechanically” reproduced. Digital music services must also obtain a performance license for the song from performance rights organizations like ASCAP, BMI, SESAC and Global Music Rights.
Sound recordings are delivered to digital music providers electronically by record labels, aggregators and distributors who license the recordings to the digital music providers, but typically do not provide metadata necessary to identify the copyright owner of the song embodied in the recording. The digital music providers “ingest” those recordings (hundreds of thousand a month on an automated basis) and, although improving, have historically made them available for streaming without adequate systems in place to identify and license the underlying songs. Rather than wait to stream the recordings until they confirmed that the song was licensed, digital music providers chose instead to stream the recordings and accrue mechanical royalties owing as if the song was licensed. In so doing, they committed copyright infringement.
As a practical matter, the greatest constituency of songwriters whose songs are unlicensed and likely infringed tend to be self-published songwriters — that is someone that wrote, owns and “administers” the song — outside of the old school publishing system. This constituency:
1. Write, record and distribute around 150,000 recordings a month for the past three years through the “do it yourself” music distributors such as CD Baby, TuneCore and Distrokid.
2. Are not members of the National Music Publishing Association; a U.S. based trade organization representing the interest of its music publisher members and that helped craft the MMA.
3. Likely have never had their information included in the database of the Harry Fox Agency, the “mechanical royalty” licensing and collecting agency.
4. Are generally not receiving licenses and getting paid for their publishing.
5. Have the greatest increasing market share by revenue over the past five years and are projected to continue to grow for the foreseeable future.
6. Present the greatest source of copyright liability to digital music providers since their songs are most likely being streamed without a license.
In this constituency, hip-hop, which is predominantly written and recorded by African Americans, is the single most dominant genre. Anecdotal evidence suggests those artists appear to represent 27 percent of the total recordings delivered to digital service by companies specializing in DIY distribution.
The Hispanic and Latino genre, also represents a significant percentage of the recordings ingested from those services.
After receiving song play reports and payment from the streaming services, the MLC will take the money and then be tasked with: (1) matching the recording to the song; (2) identifying the different copyright owners and publishers; (3) identifying what percentage of the song each owner and publisher controls; (4) calculating the royalties payable; and (5) identifying where to send payment. Mechanical royalties attributable to sound recordings whose songs cannot be matched and owners identified will be held in the interest bearing “Black Box” for later distribution.
The Transfer of Unclaimed Mechanical Royalties to Publishers by Market Share Is an Unconscionable Redistribution of Wealth and Disproportionately Impacts Minorities
Moreover, to the extent that the composition of the MLC board will likely draw from major publishers, it will have an incentive not to match the songs owned by the self-published songwriters, because major publishers will get the accrued “Black Box” royalties if the songs are not matched. This is the important part. Under the MMA, “unclaimed” mechanical royalties that have been accrued for three years by the MLC, or by a digital music provider for three years before transferring it to the MLC, will be distributed to the owners of other copyrights based on the “relative market shares of such copyright owners as reflected by royalty payments made by digital music providers.”
In other words, Jane Public writes a song, makes money, her money is “unclaimed”; and three years later it is divided primarily among the world’s largest music publishers. Why? These other publishers are not the owners of the songs. They have no more right to the unclaimed mechanical royalties than the stranger on the street. Why should the new emerging music industry of the “everyman,” with the largest growing market share, have their rightful money given to the largest publishers like Sony, Universal, Warner and BMG? They shouldn’t.
But it is more insidious than that. Distribution to publishers by market share rewards publishers in inverse proportion to any conceivable entitlement they may have to unclaimed royalties due to sophisticated systems and manpower deployed to make sure they get royalties due them. The larger a publisher’s market share, the less likely it is they own unmatched songs. The MMA likely penalizes the group most likely to own unmatched songs, self-published songwriters, and codifies a disproportionate impact on minorities who are responsible for the most dominant genre of self-published music being ingested by the digital music providers today.
And here is the kicker. Although the MMA requires three years of accrued royalties before commencing market share distributions, the MMA requires “the first such distribution” to be made in the first year after blanket licenses are available. This is because mechanical royalties accrued by digital music providers to date already satisfy the three year requirement and are eligible for distribution to publishers by market share. The MLC will not have had an adequate opportunity to match the sound recordings to the songs they embody, identify their copyright owners, encourage them to register or do much else in that time, so the largest publishers are poised for an immediate windfall and the people that wrote the songs and earned the money will have their pockets picked without even knowing it.
There is absolutely no reason to rush to re-distribute unclaimed mechanical royalties, or to ever re-distribute them to non-owners of the unmatched songs, except to line the pockets of the publisher board members (by market share).
The solution to this problem is simple. Unclaimed mechanical royalties should be maintained on deposit by the MLC indefinitely, for as long as it takes to be distributed to their rightful copyright owners. If necessary, after a very long while, escheatment laws can be followed, which generally maintain the availability of the funds in perpetuity. But there is no good or ethical reason that this money should ever be distributed to those who have no claim to it whatsoever, let alone to large music publishers based on market share.
Henry Gradstein, with King, Holmes, Paterno & Soriano LLP, is lead attorney in class action copyright infringement suits against Spotify, Sirius XM and Pandora. For the last three years, he has been listed as one of Billboard’s Most Powerful Attorneys in Music.