Note: The Music Modernization Act was signed into law on October 11, 2018. The commentary below reflects analysis of the bill prior to its signing. 

The means by which music is distributed and consumed has fundamentally changed in recent years stemming from the rise in popularity of music streaming services. This shift in consumption has brought forth an increase in litigation involving music copyrights and has exposed a growing problem in the industry: the current system for licensing music copyrights is inefficient and ineffective. The Music Modernization Act (MMA) will change many aspects of music copyright law and has received widespread support from major stakeholders on both sides including: musicians, songwriters, music publishers, record labels, and digital streaming services.

As it currently stands, protection of musical expressions in the U.S. falls under the purview of the Copyright Act. According to the Copyright Act, copyright owners have the exclusive right to reproduce, prepare derivative works, distribute, publicly perform, and publicly display the copyrighted works. Historically, rights to reproduce and/or distribute copyrighted musical compositions have been licensed under a somewhat complicated structure based on the nature of use and the identification of relevant copyright owners – both songwriters and publishers.

However, as the music industry has evolved and methods of music distribution have fundamentally changed, the mechanism for obtaining licenses and distributing royalties has failed to keep pace with the rapid technological advances and platforms through which consumers listen to and obtain music. Streaming services such as Spotify and Tidal have recently been in the news facing copyright infringement claims from music publishers administered on behalf of songwriters such as Neil Young, Stevie Nicks, Tom Petty, The Doors, Mariah Carey, Missy Elliot, and other big-name musicians.^[1] The class action suits claim, among other things, that Spotify and Tidal have failed to obtain the necessary mechanical licenses to reproduce and distribute songs offered through their streaming services.^[2]

Digital Music Licensing Basics

At its most basic level, there are two types of music copyrights: one for the sound recording^[3] and one for the musical work.^[4] Typically, an artist’s record label will control the copyright to the sound recording, and the songwriter(s) and music publisher will control the copyright to the musical work.^[5] To make copyrighted music available digitally, streaming services must obtain both a license for the sound recording (i.e., through a performance license) and for the musical work (i.e., through a mechanical license).^[6] Mechanical royalties are owed whenever music is reproduced in CDs, records, tapes, ring tones, permanent digital downloads, or played on online music streaming services.^[7]

Mechanical Licensing Basics

Under the Copyright Act, licensees such as Spotify or Tidal that seek to make and distribute reproductions of a musical work may obtain a compulsory license by serving a notice of intent (NOI) to the copyright owner (or Copyright Office if the copyright owner cannot be identified). Once a service has provided an NOI, the service must provide statements of account and pay the statutory royalty rate on a monthly basis.^[8] The Copyright Royalty Board (CRB), which is composed of three administrative judges appointed by the Librarian of Congress, is the administrative body responsible for establishing these statutory rates – a process that takes place every five years.^[9]

The current statutory rate for interactive streaming services is a percentage of the service’s revenue ranging from 11.4% to 15.1% after deducting applicable performance royalties and subject to certain royalty floors.^[10] The CRB sets this license rate according to a series of public interest directives known as the 801(b)(1) factors as set forth below.^[11]

• To maximize the availability of creative works to the public
• To afford the copyright owner a fair return for his or her creative work and the copyright user a fair income under existing economic conditions
• To reflect the relative roles of the copyright owner and the copyright user in the product made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their communication
• To minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices

Alternatively, the Copyright Act allows for a license to be privately negotiated between a copyright owner and user. Mechanical licensing negotiations are still largely accomplished through these means, typically through a mechanical license agency such as the Harry Fox Agency.^[12]

Challenges of Current System

Many parties have expressed dissatisfaction with the current system for mechanical rights licensing, pointing to administrative challenges and frustration with the rate-setting process.^[13] Streaming music providers point to an inefficient mechanical licensing process, one which is based on a per-work licensing model. For instance, these companies, which require legal access to large libraries of music, have expressed considerable frustration at having to seek licenses, sometimes totaling in the millions of dollars, from individual licensees. Additionally, this song-by-song licensing process requires these services to determine copyright ownership information for works on an individual basis. These services complain about the lack of readily available data to do so, which results in costly and burdensome efforts to identify the proper rights holders.^[14] For instance, while determining the recording artist (Jay-Z, Taylor Swift, Tom Petty, etc.) or publisher is relatively straightforward, figuring out who the songwriter is can be more complicated. An artist may have 10 different songs by 10 different songwriters on one album, or 10 separate writers may have contributed to a single song, with each being entitled to a portion of the royalty income.^[15]

Alternatively, music publishers and songwriters argue that the royalty rates established by the CRB and determined under the section 801(b)(1) factors are depressed and do not reflect the fair market value of their musical works.^[16] They argue that at the very least, compulsory mechanical royalty rates should be established under the so-called willing buyer/willing seller standard, a standard currently used by the CRB in determining certain sound recording royalty rates and discussed in more detail below.^[17]

Stakeholders also point to a lack of audit rights, which requires them to rely on self-reported royalty statements prepared without a verification procedure and based on the honor system. Additionally, music publishers and songwriters emphasize certain administrative issues for dealing with noncompliant statutory licensees, pointing to limited recourse for licensees who regularly fail to report and pay royalties on a timely and accurate basis.^[18]

Both copyright owners and music streaming services agree that the current system for identifying who is owed royalties, how they are determined, and how they are distributed is problematic.^[19] On one side, streaming service providers claim that it is difficult to identify the correct songwriter for every single song, while, on the other side, songwriters claim that services have willfully infringed their copyrights and use the identification problem as an excuse to “infringe now, apologize later.”^[20] The result has been high-profile litigation such as the Spotify and Tidal lawsuits referenced above.

The MMA represents an attempt by lawmakers to fix the system.

The New MMA Structure

The MMA, which has already been passed by both the House and Senate, would change how streaming services such as Spotify and Pandora obtain mechanical licenses and how royalties are distributed to songwriters and publishers. The MMA seeks to create a centralized entity tentatively called the Mechanical Licensing Collective (MLC), which will be responsible for the collection and distribution of royalties owed to songwriters and publishers.

The MLC will establish and maintain a public database that identifies musical works and their owners, therein reducing the number of unidentified owners of musical work copyrights.^[21] This system would both collect and distribute royalties to whichever songwriters or owners are due royalties, eliminating the need for individual digital services to seek out individual songwriters and publishers while also immunizing them from infringement lawsuits.^[22] The database would publicly identify songs that have not been matched, giving songwriters and publishers the opportunity to claim their rights.^[23] Any unmatched royalties would be held for three years, then distributed to known copyright holders on a market-share basis.^[24] The bill indicates that the MLC will be funded by the digital music services but administered by song owners. The group will be run by a board composed of 10 representatives of music publishers and four songwriters.^[25]

Royalty Rate Determination

In addition to creating the MLC, the second major aspect of the MMA is to align the rate-setting standards under which sound recording and musical works royalties are determined. Currently, the rate-setting standards and rate-setting body differ between sound recording and musical works. For instance, while the CRB sets statutory royalty rates for mechanical reproductions utilizing the 801(b)(1) factors described previously, royalty rates for sound recordings are determined using a different set of standards. For example, the majority of sound recording licenses are negotiated between prospective licensees and Performing Rights Organizations (PROs), such as the American Society of Composers, Authors and Publishers (ASCAP) and Broadcast Music, Inc. (BMI).^[26]

If a prospective licensee and PRO are unable to agree on a royalty rate, either party may apply for the determination of a reasonable rate by one of two federal district judges in the Southern District of New York.^[27] Notably, in determining a reasonable rate, the judge is tasked with assessing the fair market value of the license (i.e., what a license applicant would pay in an arm’s-length transaction).^[28] Adding to general concerns about disparate rate-setting standards is that certain sound recording licenses are under the purview of the CRB including licenses for sound recordings of “noninteractive” digital music services such as free and paid Internet radio services. These services are subject to statutory rates determined by the CRB but under a different rate-setting standard (i.e., the willing buyer/willing seller standard).^[29]

The MMA would require the Copyright Royalty Board to move to a willing buyer/willing seller standard in the determination of both performance and mechanical royalty contexts.^[30] If the MMA is passed and mechanical licenses are no longer bound by the 801(b)(1) factors, certain market participants believe that royalty rates will increase for mechanical license copyright owners.^[31] As expressed in Section 114 of the U.S. Code, the willing buyer/willing seller standard includes consideration of the following factors by Copyright Royalty Judges.^[32]

• Whether use of the service may substitute for or may promote the sales of phonorecords or otherwise may interfere with or may enhance the sound recording copyright owner’s other streams of revenue from its sound recordings
• The relative roles of the copyright owner and the transmitting entity in the copyrighted work and the service made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, and risk

In a similar vein, the MMA will allow federal rate courts to consider sound recording royalty rates as a relevant benchmark when setting performance royalty rates when PROs and prospective licensees are unable to negotiate in a private context.^[33] Last, in lieu of the current system in which performance royalties are determined by one of two federal judges in the Southern District of New York, performance royalties will now be determined with a so-called wheel approach. Under the MMA, a district judge in the Southern District Court of New York would be randomly assigned a judge from a wheel of available judges for rate-setting disputes, allowing both BMI and ASCAP, in addition to prospective licensees, the opportunity to appear in front of more than one judge “without impressions derived from prior cases.”^[34]

Other Changes to Current System

The MMA also includes other changes to the music copyright landscape. For instance, the MMA includes the CLASSICS Act, which would add copyright protection for artists who recorded music before February 15, 1972.^[35] Currently, sound recordings made before this date are not covered under federal copyright protection.^[36]

The MMA also includes the AMP Act, which would allow for the payment of performance royalties to producers, mixers, and sound engineers of sound recordings.^[37] This would mark the first time that studio professionals (i.e. producers, sound engineers, etc.) have been part of a copyright bill.^[38]

Bridging the Musical Divide

The MMA is supported by both industry camps – music publishers and songwriters on one side and digital streaming services on the other – in an industry that has often clashed over legislation.^[39]  Senator Orrin Hatch (R-Utah) called the bill “a consensus piece of legislation with virtually unheard-of support through the music industry and across the partisan divide.”^[40] The bill was unanimously passed by the House of Representative on April 25, 2018,^[41] and by the Senate on September 18. 2018.^[42]. As of this writing, the bill awaits final approval from the House before sending to the president for his signature.

Co-authored by:

Lauren Ray
Analyst, Intellectual Property Services
+1.312.752.3334
lray@stout.com

1. Megan Rose Dickey, “Spotify faces $1.6 billion lawsuit from music publisher alleging copyright infringement.” TechCrunch, January 2, 2018; Bill Donahue, “Tidal, Jay-Z Sued Over Unpaid Songwriter Royalties,” Law360, February 29, 2016; and Lesley Messer, “Spotify hit with $1.6 billion copyright infringement lawsuit,” ABC News, January 3, 2018.
2. Ferrick et al. v. Spotify USA Inc. et al., case number 1:16-cv-08412, in the U.S. District Court for the Southern District of New York; Wixen Music Publishing Inc. v. Spotify USA Inc., case number 2:17-cv-09288, in the U.S. District Court for the Central District of California; Yesh Music, LLC et al v. S. Carter Enterprises, LLC et al., case number 1:16-cv-01521, in the U.S. District Court for the Southern District of New York.
3. For example, the particular performance of the musical work that has been fixed in a recording medium such as a CD or digital file.
4. For example, the underlying composition created by the songwriter or composer along with any accompanying lyrics.
5. “Copyright and the Music Marketplace,” United States Copyright Office, February 2015, pp. 19-22.
6. Id, p. 26.
7. http://www.harryfox.com/license_music/what_is_mechanical_license.html.
8. “Copyright and the Music Marketplace,” United States Copyright Office, February 2015, p. 28.
9. Id, p. 27.
10. 37 C.F.R. §§ 385.21-22.
11. 17 U.S.C. § 801(b)(1).
12. http://www.harryfox.com/.
13. Id, p. 105.
14. Id, p. 107.
15. Congressional Record-Senate, January 24, 2018, p. S501.
16. “Copyright and the Music Marketplace,” United States Copyright Office, February 2015, p. 105.
17. Sections 112 and 114 of the Copyright Act provide that a transmitting organization is entitled to transmit to the public a performance of a sound recording under the limitation on exclusive rights specified by Section 114(d)(1)(C)(iv) or under a statutory license in accordance with Section 114(f), or for a transmitting organization that is a broadcast radio or television station licensed as such by the Federal Communications Commission and that makes a broadcast transmission of a performance of a sound recording in a digital format on a nonsubscription basis, to make no more than one copy or phonorecord of a particular transmission program embodying the performance or display. (Source: https://www.copyright.gov/licensing/sec_112.html).
18. “Copyright and the Music Marketplace,” United States Copyright Office, February 2015, pp. 108-110.
19. Id, p. 105; Congressional Record-Senate, January 24, 2018, p. S502.
20. Bill Donahue, “Music Modernization Act: 4 Big Things You Need to Know,” Law360, January 25, 2018.
21. H.R. 5447-115th Congress: Music Modernization Act. Section 102, pp. 40-44.
22. Id, p. 32.
23. Id, p. 32.
24. Id, p. 48.
25. Id, p. 35-37.
26. Unlike the mechanical right, the public performance of musical works is not subject to compulsory licensing under the Copyright Act. ASCAP and BMI are subject to government antitrust regulation through longstanding antitrust consent decrees. (Source: “Copyright and the Music Marketplace,” United States Copyright Office, February 2015, pp. 32-35).
27. The royalty determination for these two entities has taken place in the Southern District of New York since 1941 when a case titled United States v. ASCAP made ASCAP's and BMI’s licensing practices subject to consent decrees under watch of the Antitrust Division of the DOJ and the federal district court in New York City. (Source: “Copyright and the Music Marketplace,” United States Copyright Office, February 2015, p.35; Congressional Record-Senate, January 24, 2018, p. S502).
28. “Copyright and the Music Marketplace,” United States Copyright Office, February 2015, p. 41.
29. Id, p. 81.
30. H.R. 5447-115th Congress: Music Modernization Act. Section 103, p. 26.
31. “Copyright and the Music Marketplace,” United States Copyright Office, February 2015, pp. 81-83; Congressional Record-Senate, January 24, 2018, p. S502.
32. 17 U.S.C. § 114(f)(2)(B).
33. "Overview of the Music Modernization Act,” U.S. House of Representatives,  
34. Ibid.
35. H.R. 5447-115th Congress: Music Modernization Act. Section 201-202, pp. 132-135.
36. Id, p. 134.
37. H.R. 5447-115th Congress: Music Modernization Act. Section 202, p. 147.
38. H.R. 5447-115th Congress: Music Modernization Act. Section 302, p. 144-153.
39. Paula Parisi, “RIAA, NMPA, Recording Academy and More Announce Support for Music Modernization Act, Other Legislation,” Variety,
    January 8, 2018.
40. https://www.hatch.senate.gov/public/index.cfm/releases?ID=D5444387-61E7-4F85-87BA-7DE4E9E2C48C.
41. Amy X. Wang, “House of Representatives Unanimously Passes Music Modernization Act,” Rolling Stone, April 25, 2018.
42. Ed Christman, “Music Modernization Act Passes in Senate With Unanimous Support,” Billboard, September 18, 2018.