The creation of a new compulsory blanket licensing system for mechanical works, along with a new mechanical licensing collective to administer these licences is set to put an end to years of uncertainties and profoundly transform the music licensing landscape in the US.

After years of uncertainty, countless lawsuits and amidst a general sense of hope and expectation from the entire American music industry, the Orrin G. Hatch-Bob Goodlatte Music Modernization Act (“MMA”) has now been signed into U.S. law. What has been heralded by the entire music ecosystem as a well-needed reform overcame some eleventh hour hurdles to sail through the U.S. Congress and be signed into law. This comes on the back of the recent developments in Europe, which also threaten to overhaul the way music rights are used and licensed by digital services.

The Act combines three separate pieces of legislation:

  • The Music Licensing Modernization Act of 2018 which updates several key features of music licensing.
  • The Classics Protection and Access Act, which ensures that artists receive royalties on pre-1972 recordings.
  • The AMP Act (or Allocation for Music Producers Act), which will codify into law, for the first time, a producer’s right to collect royalties from non-interactive digital services.

We will examine the impact of these three texts in a series of articles to be published in the forthcoming weeks. In this alert, we will take a closer look at the central provision of the MMA, namely the new scheme that will replace the current system for licensing the right to reproduce musical works (“Songs”) when a recording embodying the same is exploited online.

Setting the stage

By way of background, providing a music download or streaming service requires that at least two different types of copyright relevant acts be considered: the act of reproduction (also called “mechanical right”) and the act of performing. This is true for Digital Music Providers (“DMPs”) all over the world.

In the US, it has been decided that a permanent download of a sound recording only exploited the mechanical rights of the underlying Song1, while it was agreed as a matter of industry consensus that a personalised non-interactive radio service like Pandora or iHeartRadio only exploited the performing rights of that Song. However, with on-demand streaming, it has generally been accepted that both the mechanical and performing rights are being exploited.

Licensing DMPs schematically works as follows: the performing right is licensed by performing rights societies (“PROs”) namely, ASCAP and BMI acting collectively on behalf of music publishers and rightsholders2in accordance with a collective licensing scheme provided for by the US Copyright Act. Mechanicals, on the other hand, are licensed directly by music publishers…if their identity is known to the DMP and their Songs, correctly identified.

Situation prior to the MMA

Under Section 115 of the U.S. Copyright Act, DMPs are indeed responsible for identifying the rightsholders that control the applicable mechanical right(s) in a Song. In practice, this amounts to identifying the rightsholders in each Song embedded within a recording in their catalogues. Where DMPs are able to correctly identify the owners of a Song, they can enter into a compulsory licence by properly serving a notice of intention (“NOI”) to do so on the copyright owner. However, it is notoriously difficult to obtain all of the relevant details of rightsholders. If a DMP is unable to identify the rightsholders in a Song, Section 115 offers an alternative solution, which entails filing an NOI with the U.S. Copyright Office instead.

In theory, NOIs enable DMPs to obtain music licenses for works where they were unable to locate sufficient ownership information that would enable them to enter into a direct licence. The problem with using NOIs is that they left DMPs legally exposed to potentially large liabilities resulting from the lack of a central database and the resulting uncertainty surrounding what, exactly, they were licensing. Tens of millions of NOIs have been filed since the process became available in 2016 but, instead of creating certainty, these mass filings were generally insufficient to cover all the works in a DMP’s catalogue and it is alleged that millions of dollars in royalties have gone unpaid. Indeed, the system’s imperfections gave rise to triple-digit lawsuits filed by rightsholders against the largest DMPs, including Apple and Spotify, for failing to enter into direct licence or file the appropriate NOI.

MMA’s impact on mechanical licensing

The MMA is set to rectify the challenges of the existing mechanical licensing system in two main ways:

1. Creation of a Mechanical Licensing Collective (the “Collective”). The MMA creates a centralized entity, akin to a collecting society, responsible for the collection and distribution of mechanical royalties. The Collective will establish and maintain a publically available database embodying information on the identity and location of copyright owners of musical works. The need for filing NOIs will thus be eliminated, and DSPs can obtain blanket licences from the Collective for their downloading and interactive streaming activities by filing a notice of licence.

2. Blanket Licensing. From 1 January 2020, DMPs will be able to obtain blanket licences from the Collective to use musical works for downloading and interactive streaming. The DMPs will be required to submit a notice of licence to the Collective, submit monthly usage reports and make royalty payments. The Collective would then distribute the royalties to the correct copyright holders by matching the information provided by the usage reports and the information contained in the database. The Collective would also distribute unclaimed royalties, where it has been unable to identify the owner of Songs for three years, further to the decision of a committee created for that purpose. DMPs with blanket licences will be required to pay an administrative fee to the Collective, to cover for its operational costs. Provided a DMP obtains and complies with the terms of its blanket licence, it will not be subject to infringement lawsuits for the reproduction and distribution rights granted in the licence. The hope is that this will provide greater certainty for DMPs and incentivise a more accurate and efficient distribution of royalties to rightsholders.

The option to enter into voluntary licences with music publishers remains. However, DMPs entering into direct licenses with music publishers will still be required to notify the Collective of their existence, and to also help pay for its operations.

Last minute changes to the draft bill

Not everyone was happy with the proposals of the MMA and there was a moment, in August, where the Act seemed to have been dealt a fatal blow. This happened when Blackstone, the owner of SESAC and, indirectly, the Harry Fox Agency, submitted a proposal to various Senate offices criticizing the creation of the Collective as a ‘government monopoly’ and proposing fundamental changes to the MMA which would allow other licensing bodies to compete with the Collective. SESAC is a forprofit licensing agency that administers licences for performing rights and its subsidiary the Harry Fox Agency administers mechanical rights. As such, they were understandably concerned about the role that the new competitor created by the MMA would play and what it would mean for their businesses.

However, a solution was found and, thanks to a compromise struck between songwriters and HFA, the Senate adopted a version of the bill containing only a clarification that the Collective will not be entitled to manage any other type of licences than mechanicals, thus leaving intact the capacity for other private players to manage other types of rights such as performing, synch or lyrics.

Remaining challenges to a brighter future

The Act is the product of a formidable industry consensus, yet there are concerns at some of the unintended consequences that the Act could leave in its trail.

The first challenge rests with the obligation for copyright holders to register their copyright directly with the Collective regardless of where they live or their nationality. Absent such registration, non-registered rightsholders risk their royalties being treated as “unclaimed” and being distributed in accordance with the three years scheme created by the Act. While rightsholders will be incentivised to register their rights with the Collective, the distribution of unclaimed royalties further to a three-year period has been widely criticized for being too short and not allowing sufficient time for independent songwriters and publishers, in the US and all over the world, to learn about the new scheme. This question becomes even more significant where unclaimed royalties may be the result of a failure by the Collective to properly identify the tracks in spite of a successful registration by a Publisher. With many accusing the scheme of unfairly benefiting major publishers, this feature of the Act is likely to generate more debate in the future.

The second challenge regards the composition of the board of director and the governance of the newly created entity including a concern that the handling, by the Collective, of a considerable amount of confidential information about the US licensing market might give an unfair competitive advantage to the Collective’s board of directors (which consists primarily of representatives of music publishers), despite the existence of a confidentiality provision in the MMA.

Despite these concerns, there is a broad industry consensus that the MMA is a positive step for DMPs and rightsholders alike. At a time when the music industry and DMPs are facing changes to the legal framework in Europe and the U.S., there is optimism that the MMA will return greater royalties to songwriters more efficiently while providing DMPs with some much-needed legal certainty to their mechanical licenses.