Executive Summary

The Hatch-Goodlatte Music Modernization Act (“MMA”) was signed into law on October 11, 2018. The MMA amends the Copyright Act in four primary areas. First, the MMA creates a new blanket licensing system that is intended to result in a streamlined process for music service providers to pay license fees for musical content. Second, the MMA enables copyright owners of musical works recorded prior to 1972 (and after 1922) to be compensated much in the same manner as copyright owners of post-1972 musical works. Third, the MMA guarantees that record producers, sound engineers, and other creative professionals receive compensation for their contributions to musical works. Fourth and finally, any of the MMA’s provisions that might later be found unconstitutional are automatically severed from the legislation. Reflecting bi-partisan support, as the name says, the MMA was designed to modernize the Copyright Act in a world dominated by new and evolving business models for music delivery.

Overview

The current U.S. Copyright Act, 17 U.S.C. §§ 101 et seq., was enacted in 1976. In the 1970s, recorded music was reproduced and publicly performed on vinyl records. Now artifacts of musical performance history, those vinyl discs (45s and LPs) have been successively replaced by 8-track tapes, cassette tapes, CDs, and finally digital radio or music streaming services over the Internet. However, U.S. copyright law has not kept pace with the music industry to reflect these technological advances and resulting consumer listening preferences.

A current patchwork, combining an outdated copyright statute, state law gap fillers, inconsistent regulatory schemes, and cobbled-together industry practices (some decades-old), has resulted in an imbalanced (and some say unfair) payment and compensation system spawning expensive bouts of protracted litigation. Few in the music industry, including artists, producers, copyright owners, music service providers and others, are entirely satisfied with the status quo.

A rare piece of bipartisan legislation, the Hatch-Goodlatte Music Modernization Act was passed by Congress in September and signed by the President on October 11, 2018. The purposes of the MMA are to create a new compulsory blanket mechanical licensing system for musical works (granting the right to reproduce and distribute copyrighted musical works through various business models); update the rate standards applicable to music licensing; modify the rate setting process by which music service providers pay for musical content provided to customers; provide copyright royalties to pre-1972 musical artists; and ensure that producers, mixers and sound engineers receive compensation for their contributions.

The MMA is divided into three substantive titles, with a fourth title providing for severance from the legislation of any of its provisions later found unconstitutional. Title I, entitled “Musical Works Modernization,” by far the longest and most complex of the three titles, creates a new blanket licensing system that, hopefully, will result in a streamlined process for music service providers to pay license fees for musical content. Title II, entitled “Classics Protection and Access,” enables copyright owners of musical works recorded prior to 1972 (and after 1922) to be compensated much in the same manner as copyright owners of post-1972 musical works. Finally, Title III, entitled “Allocation for Music Producers,” guarantees that record producers, sound engineers, and other creative professionals receive compensation for their contributions to musical works.

Title I – Modernization of Musical Works’ Licensing

The core of Title I to the MMA is the creation of a centralized entity called the Mechanical Licensing Collective (the “Collective”) to accumulate royalty payments from digital music providers under a blanket compulsory mechanical licensing system, and then distribute the funds collected to the copyright owners of the musical works. To qualify for a compulsory license, and thus immunity from infringement suits, the digital music provider must file notice(s) of intent first with the copyright owner(s) that can be identified and located, and thereafter with the Collective once it and the blanket compulsory licensing system are established. If the copyright owner(s) of the musical work(s) cannot be found after a reasonably diligent search, the royalty payments will be sent to the Collective for pro rata redistribution to other music copyright owners (after a defined holding period) based on their market share. Music providers may also obtain licenses on a work-by-work basis directly from the copyright owners, outside of this blanket compulsory licensing scheme.

Additionally, the Collective will only be permitted to administer the new blanket compulsory license for mechanical royalties. Other kinds of music licensing (e.g., rights to synchronize music with video, publication of music lyrics, and public performance rights) will be administered by the private entities that have done so historically and do so presently.

Operating costs for the establishment and continued operations of the Collective will be borne by the licensee/music providers through payment of administrative assessment fees. Part of the operations of the Collective include the creation and maintenance of a centralized database of song titles, their associated copyright owners, and the contact information for these owners. The database will be made available to the public at no charge.

Royalty rates for the mechanical compulsory licensing of musical works will be set by a new, uniform willing-buyer-willing-seller standard. This new rate-setting standard replaces the former practice that allowed for unnecessary and unfair discounts for so-called “pre-existing services.”

Title II — Compensation to Legacy Artists

For the first time, the current Copyright Act will provide a sui generis compensation right to copyright owners for musical works recorded prior to 1972. Why is 1972 such an important cut-off? That is the year when federal copyright protection was first extended to musical works. Prior to the enactment of the MMA, claims for payment for the use of pre-1972 works were protected by a patchwork of state laws and protracted litigation to determine their scope. Federal copyright protection for pre-1972 musical works will now have a base term of 95 years from the date of first publication, with an additional period of 3-15 years tacked on, depending on how recently the song was published.

Once the legislation goes into effect, digital music providers will be required to account for, notify copyright owners regarding, and pay royalties for their use of pre-1972 musical works. Unless the digital music provider and the pre-1972 music copyright owner enter into a voluntary license having its own compensation schedule, the royalties to be paid will be calculated under the same rates currently germane to post-1972 musical works.

Title III — Compensation to Music Producers

For the first time, a statutory right to royalty payments from music service providers will be granted to producers, mixers, and sound engineers contributing to the creation of musical works. No longer will this part of the music industry need to rely upon a multiplicity of agreements in order to be compensated for digital music transmissions.

According to the legislative history, this amendment to the Copyright Act codifies the practice of providing royalty allocations from musical performers to studio professionals that the private company SoundExchange has honored for many years. Under the new statutory scheme, SoundExchange is authorized to accept a letter of direction from a musical artist to “distribute, to a producer, mixer, or sound engineer who was part of the creative process that created a sound recording, a portion of the payments to which the payee would otherwise be entitled from the licensing of transmissions of the sound recording.”

Title IV — Severance

There are an untold number of ways that parties affected by the MMA could challenge its constitutionality. For example, music artists or music providers/distributors unhappy with this legislation could challenge it on equal protection, improper taxing or due process grounds. In the event any of these constitutional challenges is successful, Title IV of the MMA provides that any its provisions found to be unconstitutional would be automatically severed from the remainder of the statute without affecting its other provisions.

Summary

The MMA legislation was the product of significant bipartisan collaboration, having passed the House and Senate unanimously. Of equally importance, the final legislation was supported by both the entertainment industry and technology sector, which frequently clash over copyright policy and have engaged in contentious litigation over these issues in the past. These amendments to the Copyright Act also, for the first time (at least in part), tackle the thorny issue of what to do about paying royalties to copyright owners who could not be located - so-called “orphan works.”

The current Copyright Act is now a statute that is four decades old and sorely in need of a major overhaul concerning myriad issues. Until that enormous task is accomplished, the MMA is a major step in the right direction of fair compensation for the use of musical works.