Music Licensing Overhaul Signed Into Law

Home , Copyright Royalty Board, Music licensing

Intellectual Property& Technology Law Journal Edited by the Technology and Proprietary Rights Group of Weil, Gotshal & Manges LLP

VOLUME 30 • NUMBER 12 • DECEMBER 2018

By Todd Larson, Jeremy C. Cain, and Jeremy P. Auster

30 resident Trump recently signed into law the Orrin albums, CDs and, more recently, digital downloads. PG. Hatch- Bob Goodlatte Music Modernization But the song-by-song licensing process mandated by August Act (MMA). The MMA consolidates three previ- the antiquated provisions of Section 115 has proved ously separate bills introduced over the past year: the remarkably burdensome – not to mention risky – original Music Modernization Act, the CLASSICS for interactive streaming services such as Spotify and 2018 (Classics Protection and Access) Act, and the AMP Amazon, who typically offer tens of millions of songs (Allocation for Music Producers) Act. As many com- for on-demand streaming, and nearly all of whom mentators have noted, the MMA represents the most have been sued for hundreds of millions of dollars in 8 significant music- related legislation since 1998’s statutory damages as a result of uncleared composi- Digital Millennium Copyright Act. tions that fell through the licensing cracks. The MMA was motivated by the industry-wide desire to fix that Modernizing the Section 115 problem. Mechanical License Section 115 of the Copyright Act1 establishes a The Blanket Mechanical License compulsory license for the rights to reproduce and The chief innovation of the MMA is the intro- distribute “mechanical” copies of nondramatic musi- duction – by January 1, 2021 – of a blanket license cal works, i.e., the underlying compositions embodied for mechanical rights in interactive streams and in sound recordings. For the better part of a hun- downloads (“covered activities” under the statute). A dred years, recording artists have secured mechani- digital music provider will be able to obtain a blan- cal licenses from songwriters (or their affiliated ket license by filing a simple notice with the newly music publishers) to include specific songs in their established Mechanical Licensing Collective, and thus avoid any need to file song-by-song notices.2 Rates for the blanket license will be set by the Todd Larson, an IP/Media partner in Weil, Gotshal & Manges Copyright Royalty Board in judicial proceedings LLP’s Litigation Department, represents and counsels a variety of similar to those used to set rates and terms for the traditional and new media clients. Jeremy C. Cain is an associate current Section 115 compulsory licenses.3 Digital in the firm’s Litigation Department, where he focuses his practice music providers and music publishers can also con- on complex commercial litigation and intellectual property tinue to negotiate mechanical licenses on a voluntary matters. Jeremy P. Auster is an associate in the firm’s Complex Commercial Litigation and Intellectual Property and Media practice basis, with works covered by such licenses (and pre- groups. The authors may be reached at [email protected], sumably payments for such works) carved out from [email protected], and [email protected], respectively. the blanket license. Liability Limits for Prior Unlicensed Uses reproduction and distribution rights in covered Digital music providers that comply with activities.8 the payment and reporting terms of the blanket In a change from typical practice – where the mechanical license, once available, will be shielded expenses of collecting agencies like SoundExchange, from infringement liability for reproducing or American Society of Composers, Authors and distributing musical works in covered activities.4 Publishers (ASCAP), and Broadcast Music, Inc., The MMA also severely limits service liability for (BMI) are deducted from royalty collections prior mechanical copies made prior to the 2021 introduc- to distribution – the Collective is to be built and tion of the blanket license, including activities prior funded by an administrative assessment paid by even to enactment of the MMA itself. Specifically, blanket licensees on top of their license fees.9 The in any infringement suit filed after January 1, 2018, dollar amount and allocation of this assessment the copyright owner’s remedy is limited to the across licensees will be determined in separate pro- recovery of royalties due, provided the music service ceedings before the Copyright Royalty Board, the has made ongoing good- faith efforts (prescribed first of which is to commence within 270 days of in detail) to identify and pay for all works used on enactment of the MMA and conclude within a year its service, and has otherwise accrued payments for of commencement.10 unidentified works.5 This effectively forecloses new Somewhat controversially, the MMA requires lawsuits like those that bedeviled Spotify, Rhapsody, that even entities that may choose not to utilize and other on-demand streamers accused of failing the Section 115 blanket license or the services of to secure mechanical licenses in advance of offering the Collective – what the Act calls “Significant certain songs. Nonblanket Licensees” (SNLs) – nonetheless must pay a share of the administrative assessment and pro- The Mechanical Licensing Collective vide usage reports to the Collective or face enforce- The MMA establishes a Mechanical Licensing ment actions and damages.11 SNLs are defined as Collective to collect and distribute Section 115 roy- entities engaging in covered activities that offer alties to music publishers and songwriters.6 In order more than 5,000 sound recordings under volun- to fulfill that task, the Collective is charged with tary and/or individual download licenses and meet building and maintaining a Musical Works Database modest revenue thresholds.12 that will link sound recordings (as reported by In another somewhat controversial provision, licensee services) to the underlying musical com- in the event a blanket licensee plays tracks that the positions embodied in those recordings, along with Collective cannot tie to a copyright owner, the the information identifying the owners of the com- MMA requires the Collective to hold on to the positions and their respective ownership shares. royalties for such performances for three years in This database shall be made available to the public an interest- bearing account and to make a series free of charge in a searchable, online format, and to of specified efforts to identify the rightful recipi- digital music providers in a bulk, machine-readable ent. After that point, any still unclaimed royalties format.7 are to be allocated and distributed to known pub- Notably, the MMA largely limits the Collective lishers based on their respective market shares – a to offering and administering (but not negotiat- process likely to favor large publishers with popu- ing or pricing) the blanket license – a compromise lar, well-known catalogs over smaller songwriters motivated by the objections of private entities such who may not know to register their works with the as the Harry Fox Agency who were concerned the Collective.13 Collective would leverage its role as an industry- subsidized mechanical licensing administrator to Changes Beyond Section 115 compete in the voluntary licensing of performance, The MMA alters in several significant ways the synchronization, lyric, and other publishing rights. operation of the ASCAP and BMI rate courts and While the Collective will be allowed to adminis- the Copyright Royalty Board, the judicial bodies ter voluntary as well as compulsory licenses, that charged with setting royalty rates for various uses of remit is limited to voluntary licenses granting only musical compositions and sound recordings.

2 Intellectual Property & Technology Law Journal Volume 30 • Number 12 • December 2018 Assignment of Judges in ASCAP and BMI DOJ that it intends to review, and potentially ter- Rate Court Cases minate, the existing ASCAP and BMI decrees. To start, the MMA changes the manner in which judges are assigned to so-called “rate court” Changes to Copyright Royalty Board Rate proceedings that set rates and terms for the pub- Setting lic performance of musical works14 under licenses Currently, the Copyright Royalty Judges are from ASCAP and BMI. Currently, rate-setting guided by the so-called “801(b)” standard when cases under the ASCAP and BMI antitrust consent they set rates for the Section 115 compulsory decrees are assigned to the same designated judges mechanical licenses and the Section 114 statu- in the U.S. District Court for the Southern District tory licenses covering the public performance of of New York (SDNY): Judge Cote for ASCAP and sound recordings by satellite radio and “preexist- Judge Stanton for BMI. Under the new law, rate- ing subscription services” (e.g., Music Choice). court petitions will be assigned to other SDNY The MMA eliminates the 801(b) standard – which judges on a random basis, with Judges Cote and previously has provided the judges a degree of Stanton retaining jurisdiction over the ASCAP policy discretion when setting rates – and imposes and BMI consent decrees generally but getting an across-the-board application of the “willing involved in specific rate-court cases only where buyer/willing seller” rate-setting standard cur- a party seeks an interpretation of the respective rently used to set the rates for non-interactive Decree.15 webcasters. That standard requires the judges to set rates based on what would be negotiated on the Benchmark Evidence in Rate Court Cases open market, without the accompanying policy Previously, § 114(i) prohibited the ASCAP and considerations.16 BMI rate-court judges from considering as bench- Section 103 of the MMA also extends the statu- marks the rates paid by digital music providers to tory license rates applicable to satellite radio and sound recording owners (which historically have the preexisting subscription services (currently set often been higher than the rates paid to perform the through year-end 2022) through the end of 2027, underlying musical works as licensed by ASCAP meaning there will be no need for the “SDARS IV” and BMI). CRB rate-setting proceeding that otherwise would Section 103 of the MMA maintains that pro- have set rates for the 2023-2027 period. hibition, but now exempts certain service catego- ries – namely, digital audio streamers such as Sirius The CLASSICS Act XM, Pandora, and Spotify – from its ambit, thereby Title II of the MMA, the Classics Protection and allowing the PROs to present evidence of sound Access Act (the CLASSICS Act), provides a new, sui recording royalty rates in future cases involving such generis digital performance right for sound record- entities. The MMA thus preserves the 114(i) prohi- ings made before February 15, 1972, which had not bition for others, such as radio broadcasters (includ- previously been subject to federal copyright pro- ing their streaming operations) and video streamers. tection. Rather than providing for a full copyright in pre-72 recordings, the CLASSICS Act instead Department of Justice Review of Consent states that the unlicensed use of pre-72 record- Decrees ings subjects the user (other than terrestrial radio Section 105 of the MMA provides that, upon broadcasters) to federal copyright infringement request, the Department of Justice will provide liability, with otherwise applicable state and com- Congress with information relating to its review of mon law claims preempted.17 Furthermore, statu- the antitrust consent decrees governing the opera- tory damages and attorneys’ fees are available only tions of ASCAP and BMI. The U.S. Department if the rights owner has (i) previously filed paper- of Justice (DOJ) must also notify Congress before work with the Copyright Office identifying its seeking to terminate an existing consent decree in pre-72 recordings and (ii) provided 90 days’ notice federal court. This provision stems from the recent to a music service that its use of the recordings is announcement by the Antitrust Division of the unauthorized.18

Volume 30 • Number 12 • December 2018 Intellectual Property & Technology Law Journal 3 To avoid infringement liability, music services the artists provide for such payment (or, for sound can pay for pre-72 recordings through voluntary recordings fixed before November 1, 1995, even licenses or (if they qualify) under the above-men- absent such a contractual promise).23 Such producer tioned statutory licenses (which on their face have payments are to be made from the 45 percent share governed only copyrighted post-1971 recordings). of streaming royalties currently allocated to record- Such services must also pay three years of back royal- ing artists under the statutory license. ties, if they have not done so already, to avoid liability for the pre-enactment period.19 The law further Notes provides that digital services that voluntarily license 1. 17 U.S.C. § 115; Subsequent section citations are to pre-72 recordings after enactment shall pay half of Title 17 (17 U.S.C.) unless otherwise indicated. the agreed-upon royalties to SoundExchange for 2. Traditional Section 115 licensees such as record compa- distribution to recording artists under the prevailing nies can continue to follow the existing work-by-work statutory splits.20 licensing process for songs included in their recordings, In an effort to address the concerns of various and may obtain individual “download licenses” to cover public-interest groups, the CLASSICS Act does not their own distributions of such works in the form of extend this new federal protection for all pre-72 downloads. § 115(d)(1)-(2). recordings until 2067, as was the case in previous 3. § 115(c)(1), (d)(8). drafts of the legislation. Rather, such recordings will 4. § 115(d)(1)(D). enter the public domain after a period of 95 years 5. See § 115(d)(10). 6. § 115(d)(3). after their publication plus a “transition period” that 7. See § 115(d)(3)(E). varies depending on their year of publication. (The 8. See § 115(d)(3)(C). net effect of the transition period, however, is that 9. § 115(d)(4)(C), (d)(7). works recorded from 1956-1972 will still not enter 10. See § 115(d)(7)(D). 21 the public domain until February 15, 2067.) The 11. § 115(d)(6). CLASSICS Act also confirms that federal defenses 12. See § 115(e)(31). Public broadcasting entities and digital to infringement such as fair use and the DMCA providers offering only short, free-to-the-user preview safe harbors apply to pre-72 recordings, and pro- streams in conjunction with non-covered activities (e.g., vides certain additional safe harbors for the non- video synchronization) are specifically exempted. See § commercial use of orphaned pre-72 recordings by 115(e)(31)(B)(i)-(ii). librarians, archivists, and the like.22 13. § 115(d)(3)(H)-(J). 14. Performance rights are distinct from the mechanical The AMP (Allocation for Music (reproduction and distribution) rights discussed above Producers) Act and covered by the § 115 blanket license. Title III of the MMA, likely the least controver- 15. See § 28 U.S.C. § 137(b). sial portion, provides that the entity that collects and 16. § 115(c)(1)(F); § 114(f)(1)(B). distributes sound recording royalties under Section 17. 17 U.S.C. §§ 301(c), 1401(a), 1401(e). 114 statutory licenses (currently SoundExchange) 18. 17 U.S.C. § 1401(f). can distribute a share of the royalties to producers, 19. § 1401(e). sound engineers, and mixers pursuant to “letters of 20. § 1401(d)(2). direction” submitted by artists or record companies 21. § 1401(a)(2)(A). where the producers’ or engineers’ contracts with 22. § 1401(c), (f). 23. § 114(g)(5).

Copyright © 2018 CCH Incorporated. All Rights Reserved. Reprinted from Intellectual Property & Technology Law Journal, December 2018, Volume 30, Number 12, pages 7–10, with permission from Wolters Kluwer, New York, NY, 1-800-638-8437, www.WoltersKluwerLR.com