AGENCY:

U.S. Copyright Office, Library of Congress.

ACTION:

Interim rule.

SUMMARY:

The U.S. Copyright Office is issuing an interim rule regarding the obligations of the mechanical licensing collective to report and distribute royalties paid by digital music providers under the blanket license to musical work copyright owners under title I of the Orrin G. Hatch-Bob Goodlatte Music Modernization Act. After soliciting public comments through a notice of proposed rulemaking, the Office is now issuing regulations establishing the timing, form, and delivery of statements accompanying royalty distributions to musical work copyright owners. These regulations concern only royalty statements and distributions regarding matched uses of musical works embodied in sound recordings and do not address issues related to the distribution of unclaimed, accrued royalties.

DATES:

Effective October 19, 2020.

FOR FURTHER INFORMATION CONTACT:

Regan A. Smith, General Counsel and Associate Register of Copyrights, by email at regans@copyright.gov or Terry Hart, Assistant General Counsel, by email at tehart@copyright.gov. Each can be contacted by telephone by calling (202) 707-8350.

SUPPLEMENTARY INFORMATION:

I. Background

Title I of the Music Modernization Act (“MMA”), the Musical Works Modernization Act, substantially modifies the compulsory “mechanical” license for making and distributing phonorecords of nondramatic musical works available under 17 U.S.C. 115. Prior to the MMA, a compulsory license was obtained by licensees on a per-work, song-by-song basis, and required a licensee to serve a notice of intention to obtain a compulsory license on the relevant copyright owner (or file the notice of intention with the Copyright Office if the Office's public records did not identify the copyright owner and include an address at which notice could be served) and then pay applicable royalties accompanied by accounting statements.^[1]

The MMA amends this regime in multiple ways, most significantly by establishing a new blanket compulsory license that digital music providers (“DMPs”) may obtain to make digital phonorecord deliveries (“DPDs”) of musical works, including in the form of permanent downloads, limited downloads, or interactive streams.^[2] Instead of licensing one song at a time by serving notices of intention on individual copyright owners, the blanket license will cover all musical works available for compulsory licensing and will be centrally administered by a mechanical licensing collective (“MLC”), which has been designated by the Register of Copyrights.^[3] Under the MMA, compulsory licensing of phonorecords that are not DPDs (e.g., CDs, vinyl, tapes, and other types of physical phonorecords) (the “non-blanket license”) continues to operate on a per-work, song-by-song basis, the same as before.^[4]

On September 24, 2019, the Copyright Office issued a notification of inquiry (“NOI”) to initiate this current proceeding regarding implementing regulations for the blanket license.^[5] The Office invited public comment on regulations that the MMA specifically directs it to adopt, as well as additional regulations that may be necessary or appropriate to effectuate the new blanket licensing structure. Among the issues the notification sought comment on was “the MLC's payment and reporting obligations with respect to royalties that have been matched to copyright owners, both for works that are matched at the time the MLC receives payment from digital music providers and works that are matched later during the statutorily prescribed holding period for unmatched works.” ^[6] On April 22, 2020, the Office issued a notice of proposed rulemaking (“NPRM”) soliciting public comments on proposed regulations regarding those obligations.^[7] The Office received comments from seven parties in response to the NPRM and engaged in follow-up discussions with interested parties pursuant to its ex parte guidelines, as discussed further below.

Commenters largely agreed that the NPRM generally struck the appropriate balance. The MLC said it “appreciates the Office's consideration of the unprecedented licensing regime that the MLC is responsible to implement from scratch, and finds that the NPRM does an excellent job empowering the MLC to carry out the functions that it was designated to fulfill.” ^[8] The Future of Music Coalition (“FMC”) said it “continues to appreciate the Office's ongoing efforts to implement the Music Modernization Act in ways that accord with legislative intent, that demonstrate ongoing concern for fairness to all parties, that increase transparency, and that harmonize the public interest with the interests of creators, including songwriters and composers.” ^[9] Music Reports said it “enthusiastically endorses the overall framework and degree of balance generally achieved throughout.” ^[10]

Having carefully considered the comments and other record materials in this proceeding, the Office now issues an interim rule that overall closely follows the NPRM, but with a number of modifications based upon public comment. Most significantly, the interim rule clarifies the MLC's timing and delivery obligations with respect to royalty distributions, adjusts the MLC's certification requirement, and explicitly provides for an annual statement to copyright owners. Additional modifications are made regarding the timing of adjustments, the content of royalty statements, and the minimum payment threshold.

In drafting this interim rule, the Office has been mindful of both its longstanding goals of promulgating practical regulations that result in prompt payment to copyright owners ^[11] and the need to balance the principles identified in the NPRM: Establishing a minimum floor of transparency and accountability that songwriters and publishers can expect of the MLC and avoiding over-regulation by ensuring the MLC retains sufficient flexibility to ably implement a complex and challenging licensing regime.^[12] The success of the blanket license is dependent both on the ability of the MLC to administer the license fairly, transparently, and efficiently, and on the confidence songwriters and music publishers (and, for separate aspects, DMPs) have in the process. Copyright Office regulations are an important mechanism for ensuring transparency and accountability in the blanket licensing regime,^[13] but they are not the sole mechanism; other provisions in the statute as well as the governance of the MLC itself provides incentive for it to be responsive to the needs of copyright owners.^[14]

The Office has determined that it is prudent to promulgate this rule on an interim basis so that it retains some flexibility for responding to unforeseen complications in royalty reporting once the MLC begins distributing royalties. As noticed in the NPRM, adopting the rule on an interim basis is intended to “facilitate adjustment on topics noticed in this rulemaking if necessary once the MLC begins issuing royalty statements to copyright owners.” ^[15] Multiple commenters supported that proposal, and none opposed an interim rule.^[16]

II. Interim Rule

The NPRM addressed the information that the MLC is required to report in royalty statements, as well as the format and delivery of such statements and related distribution payments. The interim rule is intended to balance the primary concerns of copyright owners in getting prompt and accurate royalty payments with the operational realities of the MLC in administering the blanket license. The Office has looked to the existing song-by-song compulsory license as a baseline for the level of information that copyright owners expect under the blanket license, as well as the standard for accuracy in royalty reporting, while bearing in mind any relevant shortcomings of the song-by-song licensing regime that motivated passage of the MMA.

Timing and distribution of royalties and royalty statements. The MLC commented that the proposed requirement to report newly reported royalties, newly matched royalties, and adjustments simultaneously “would cause needless operational complexity and reporting delays to copyright owners.” ^[17] The Office's intent in proposing concurrent reporting was to “minimize and simplify administration for both the MLC and copyright owners.” ^[18] Given the MLC's response that concurrent reporting would instead make administration more difficult, the Office has adopted the MLC's proposed language clarifying that while royalties in either case must be reported monthly, there is no requirement that the reports are made simultaneously.

The Office made further updates related to the timing and delivery of royalty statements in light of the public comments. The interim rule has removed the phrase “for the month next preceding” in the provision for distribution of royalties based on comments by SoundExchange and supported by the MLC, emphasizing the practical difficulties in meeting this requirement.^[19] The aim of that language, carried over from the statutory requirements for the song-by-song licensing framework,^[20] was to indicate that the MLC would distribute all royalties that have become payable since the prior monthly distribution, but the MLC and SoundExchange suggested this language was ambiguous.^[21] In addition, the Office considered several comments that suggested adding an additional timing requirement and offered various periods, triggers, and exceptions upon which to base this requirement.^[22] For its part, the MLC opposed adding a further requirement that obligated the distribution of royalties within a certain period beyond establishing a monthly cadence for reporting, calling it “overly prescriptive.” ^[23] It explained that it “already has a substantial interest in ensuring royalties are timely reported and distributed in the most efficient manner possible.” ^[24] It added that its royalty processing activities will “depend heavily on the quality and timeliness of DMP usage reporting to the MLC” and sought to avoid regulatory language that would connect the MLC's reporting obligations to external dependencies, such as the receipt of untimely or incomplete information from blanket licensees.^[25]

After considering the comments and the MLC's reported operational expectations, the interim rule replaces the phrase “for the month next preceding” with alternative language similar to that proposed by the MLC to clarify that the MLC will pay out all royalties ready to be distributed to copyright owners when the MLC makes its regular monthly distributions. This encompasses royalties that have been reported by DMPs and matched to musical works, where the musical work copyright owner is known and located, where the MLC has all the necessary tax and financial information from the copyright owner to make a payment, and where the royalties are not subject to any dispute or other legal hold. This approach is intended to take into account the role of third parties, including DMPs and musical work copyright owners, for many of the inputs needed by the MLC before royalties can be distributed.

The Office believes that the interim rule strikes an appropriate balance in solidifying the expectation that the MLC will promptly pay copyright owners all royalties that can be paid on a monthly basis, while avoiding a requirement that may overlook the potential impact of dependencies outside the MLC's control. The Office acknowledges the MLC's statements that it has an inherent interest in timely payments to copyright owners, given that it is governed by and accountable to those copyright owners, and it is required to pay interest on accrued royalties for unmatched works.^[26] To promote transparency in the timeliness of payments, the Office is separately considering whether the MLC should be required to report average royalty processing and distribution times as part of its annual report in a separate rulemaking and can revisit this issue if warranted.^[27]

The MLC also objected that the requirement to immediately report adjustments on a monthly basis “could be tremendously burdensome.” ^[28] It explained that “reports of adjustment from DMPs are likely to relate to royalty pool calculations, and to therefore result in a recalculation of the effective per-play rate, which would require an adjustment to all distributed (and undistributed) royalties.” ^[29] The MLC also maintained it “could be extremely costly with little benefit to copyright owners.” ^[30] Instead, the MLC proposed that the rule only require it “to report adjustments to copyright owners after it has received the total adjustments reported in the annual reports of usage delivered to the MLC by DMPs pursuant to proposed regulation § 210.27(f).” ^[31] The MLC noted that this would “alleviate the immense administrative burden” of processing all adjustments immediately, though it also would not prevent the MLC from reporting adjustments more frequently than annually.^[32] The Office did not receive any comments suggesting there was a need to report adjustments monthly, or opposing the MLC's proposal.

The Office finds the MLC's proposal reasonable and has adjusted the rule accordingly. The Office observes that changing the requirement to report adjustments at least on an annual basis may increase the value of the MLC providing a defined annual statement to copyright owners, as discussed below. As the MLC notes, an adjustment that affects royalty pool calculations would affect all previously reported royalties; an annual statement could significantly assist copyright owners—particularly independent songwriters and smaller music publishers—in reconciling their bookkeeping following a reported adjustment.

Content. The interim rule also includes several adjustments to the content that the MLC is required to report in royalty statements to copyright owners based on unopposed comments it has received.^[33] Notably, the interim rule has added, at the suggestion of the MLC and FMC, a requirement to report “[a] detailed and step-by-step accounting of the calculation of royalties under applicable provisions of part 385 of this title, sufficient to allow the copyright owner to assess the manner in which the royalty owed was determined and the accuracy of the royalty calculations, which shall include details on each of the components used in the calculation of the payable royalty pool.” ^[34] This information is provided to copyright owners under the song-by-song license.^[35] It will continue to be reported by DMPs to the MLC as part of their monthly reports of usage,^[36] and the MLC intends to pass along this information to copyright owner.^[37] The MLC expressed concern that unless the regulations explicitly require it to report this information to copyright owners, the Office's separate confidentiality regulations might prevent disclosure.^[38] The Office has added an explicit requirement in the regulations to clarify that the accounting information would not be considered confidential information and its disclosure to copyright owners by the MLC could not be prevented under confidentiality regulations.^[39]

Several commenters suggested making certain content fields mandatory to report, including IPI, ISWC, and universal product code (UPC), which the Office has done.^[40] In doing so, the Office reiterates that the interim rule only establishes a floor of what the MLC can report, and the Office understands that the MLC intends to report most, if not all, information it receives regarding royalties to copyright owners.^[41]

The NPRM also solicited comments on whether the phrase “known to the MLC” is “an appropriate standard for triggering an obligation to report information that the MLC is not expected to have for all musical works, sound recordings, and/or copyright owners?” ^[42] The MLC responded affirmatively,^[43] while SGA disagreed and said the MLC should be required to undertake best efforts to collect information it does not have.^[44] After considering the comments, the Office has determined that “known to the MLC” is an appropriate standard for reporting certain types of information to copyright owners that the MLC may not necessarily have. To the extent the MLC has obligations to collect information related to identification of musical works and sound recordings, those obligations are already addressed elsewhere in the statute.^[45] To report and distribute royalties, the MLC will need sufficient information to have matched the royalties to the works and identified the copyright owner, so any efforts to collect information and identify works and copyright owners—including policies and procedures for verifying information received from third parties and dealing with potentially conflicting information—occurs at an earlier stage than the one addressed by this rule, and the information reported to copyright owners will presumably also connect to information that the MLC makes available through the statutorily-prescribed public database. Additionally, the MLC has commented that it “intends to provide as much data in the royalty statements as it has and that may be useful to copyright owners.” ^[46]

Delivery of royalty statements. The Office has clarified the provision regarding delivery of royalty statements to copyright owners to address issues raised by commenters. The interim rule provides that, by default, royalty statements will be delivered to copyright owners electronically, including through a password-protected online portal.^[47] The Office understands the MLC intends to provide a number of alternative types of royalty reporting at the request of copyright owners, but the interim rule states that at a minimum the MLC will provide a simplified report containing fewer data fields at the request of copyright owners.^[48] The interim rule has also updated this provision with respect to the provision of paper statements. As the MLC has requested, the provision clarifies that a copyright owner may request to receive royalty statements by mail, and the MLC will be obliged to send a physical copy in simplified or summary format upon request where the statement reports “a total royalty payable to the copyright owner for the month covered that is equal or greater than $100.” ^[49]

Certification. In a carry-over from a requirement of the song-by-song statutory licensing regime, the NPRM proposed to require the MLC to certify monthly royalty statements under the blanket license where the total royalties distributed during the period covered by the statement exceed $100 using one of two statements.^[50] This proposal was “applaud[ed]” by SGA,^[51] and, as noted in the NPRM, had been supported by Music Reports in an earlier stage of comment.^[52] SoundExchange, however, called the requirement “unfair and unnecessary” because “the MLC simply cannot know if the service provider's royalty calculations and usage data were accurate.” ^[53] The MLC voiced similar concerns, noting that the cost of the associated annual audit that would be required under the second proposed certification statement “is expected to exceed $100,000—an expenditure that was not contemplated in the MLC's initial budgeting.” ^[54] The MLC proposed that the requirement be removed entirely or, alternatively, be amended with language suggested by the MLC,^[55] which clarifies that “[t]he MLC can only certify its allocation and statementing processes.” ^[56] The MLC sought an ex parte meeting to agree with the concerns raised by SoundExchange with respect to the MLC's inability to certify the accuracy of data on usage and royalty pools that emanates from the DMPs rather than the MLC, and proposed alternate language if the Office elected to retain the certification requirement.^[57]

As background, the Office notes that the MMA includes additional verification mechanisms. Correcting the longstanding lack of an audit right under the old section 115 statutory license in contrast to voluntary licensing practices, it allows the MLC to “conduct an audit of a digital music provider operating under the blanket license to verify the accuracy of royalty payments by the digital music provider to the mechanical licensing collective.” ^[58] And it added two separate audit provisions for the MLC itself. First, the statute requires the MLC itself to retain a qualified auditor to examine the books, records, and operation of the MLC beginning in the fourth full calendar year after initial designation of the MLC and every five years afterward.^[59] The auditor is required to prepare a report addressing “the implementation and efficacy of procedures of the mechanical licensing collective—(AA) for the receipt, handling, and distribution of royalty funds, including any amounts held as unclaimed royalties; (BB) to guard against fraud, abuse, waste, and the unreasonable use of funds; and (CC) to protect the confidentiality of financial, proprietary, and other sensitive information.” ^[60] The report is required to be delivered to the MLC's board of directors and the Register of Copyrights and be made publicly available.^[61] The MMA also permits a copyright owner entitled to receive payments of royalties for covered activities from the mechanical licensing collective to conduct an audit of the mechanical licensing collective to verify the accuracy of royalty payments by the mechanical licensing collective to such copyright owner.^[62] The MMA's adoption of these audit provisions had been praised by stakeholders, although some have also noted that the adopted language also carries limits.^[63]

Considering these provisions and the additional comments, the Office has retained the certification requirement, but with adjustments in light of the MLC and SoundExchange's comments. As explained in the NPRM, while the certification of usage reports by the DMPs, as required by the statute, serves an important purpose, that certification does not account for the additional processing of statements performed by the MLC, and the new audit right may not ameliorate the value of certification to copyright owners, including the minority of owners accustomed to receiving monthly certifications under the prior song-by-song statutory licensing system.^[64] The Office acknowledges that it would be inappropriate for the MLC to certify as to facts and processes outside its control, and is therefore modifying the scope of the certification requirement to limit the statement to those facts that the MLC has knowledge about, as the MLC has proposed. The Office is also deferring (but not eliminating) the CPA review requirement for one year to provide time for the MLC to undertake a CPA examination of its processes and internal controls. Overall, this requirement is intended to assure copyright owners that the various inputs and calculations that result in a final royalty payment are verified, as is presently the case with the non-blanket license, although in this case the certification has been split to reflect the respective duties of the DMPs and the MLC.

Payment thresholds. Several commenters noted that the proposed minimum payment thresholds of $2 for direct deposit, $100 for paper checks, and $250 for wire transfer in the NPRM were appropriate; ^[65] however, both the MLC and SoundExchange found them low.^[66] The MLC provided a table of payment thresholds from various U.S. and foreign collective management organizations and rights management organizations in one of its ex parte submissions, which helpfully provides data points for industry practices on this issue.^[67] Based on these submissions, the interim rule raises the minimum payment threshold for direct deposit from $2 to $5, as suggested by the MLC.^[68] These thresholds are ceilings; the MLC may in its judgment establish lower thresholds.^[69]

The interim rule adds an additional provision, at the MLC's request, specifying that where the collective elects to defer the royalty payment and statement because the accrued royalties did not exceed the applicable threshold, if a copyright owner submits a written request, the mechanical licensing collective will make available information detailing the accrued unpaid royalties processed as of the date of the request, and removes the proposed provision that would obligate the MLC to pay royalties below the $5 threshold upon such requests.^[70] This clarification is intended to promote operational efficiencies while still preserving the ability of copyright owners to obtain sufficient information with respect to accrued royalties below the $5 threshold.^[71]

Annual statements. The NPRM did not require the MLC to provide annual statements to musical work copyright owners, but sought comment on this issue. In response, the MLC agreed with the proposed rule's approach, stating “a regulation at the outset of its operations requiring reporting in annual statements that would not, as acknowledged, provide any additional information would be overly prescriptive.” ^[72] But CISAC & BIEM,^[73] FMC,^[74] and SGA ^[75] commented in support of requiring an annual statement. SGA wrote, “Annual Statements serve an important purpose for small businesses (including independent creators acting as their own music publishing entities), which generally lack extensive accounting resources and need as many available resources as possible in conducting their own annualized, internal bookkeeping audits.” ^[76] FMC similarly said annual statements “would be helpful for small publishers and self-published writers' accounting and tax purposes” and added that “while the MMA did not include making accounting more efficient for smaller copyright holders as an explicit objective, it conforms to the overarching goal of creating a more functional ecosystem.” ^[77]

The MLC responded to these comments in a follow-up ex parte meeting.^[78] There, the MLC represented that “it intends to provide copyright owners with the ability to access their royalty information in a number of ways through the MLC Portal, including to allow copyright owners to view reports of information on an annual basis.” ^[79] It reiterated that it does not believe regulations should include a formal requirement to provide annual reports, saying the best way to address songwriters' needs for annual statements “will be by providing functionality in the MLC Portal that enables songwriters and publishers to view their royalty data across multiple periods that they select,” and adding that “[t]his approach will allow each copyright owner to define the start and end dates of these annual (or other) periods based on their own preferences (e.g., calendar year versus fiscal year).” ^[80]

The Office appreciates the MLC's response. While its proposed approach is not unreasonable, the Office ultimately concludes that, given the requirement for annual statements in the existing song-by-song compulsory license, the support expressed by other commenters for regulatory certainty with respect to an annual statement requirement, and the MLC's intent to provide the ability to generate annual statements, it is appropriate for the interim rule to include an annual statement requirement. As noted, other comments indicate that certainty of an annual roll-up may be beneficial to smaller businesses, and so the regulatory language requires the MLC to deliver a cumulative statement including the information reported in monthly statements as well as any adjustment. But the language adopted provides the MLC with flexibility in implementing it, and it seems it would not require any more from the MLC than what it is already planning to provide. But at the same time, it communicates a level of certainty for purpose of stakeholder expectations and planning, which is intended to further the overall operation of the blanket license regime.

List of Subjects in 37 CFR Part 210

• Copyright
• Phonorecords
• Recordings

Interim Regulations

For the reasons set forth in the preamble, the Copyright Office amends 37 CFR part 210 as follows:

PART 210—COMPULSORY LICENSE FOR MAKING AND DISTRIBUTING PHYSICAL AND DIGITAL PHONORECORDS OF NONDRAMATIC MUSICAL WORKS

1. The authority citation for part 210 continues to read as follows:

Authority: 17 U.S.C. 115, 702.

Subpart B—Blanket Compulsory License for Digital Uses, Mechanical Licensing Collective, and Digital Licensee Coordinator

2. Add § 210.29 to read as follows:

Footnotes