The Architecture of Compromise: Constructing the Music Modernization Act

• Publication year: 2019
• Author: William B. Colitre

The Architecture of Compromise: Constructing the Music Modernization Act

William B. Colitre

Bill Colitre is the Vice President & General Counsel of Music Reports, Inc. In this role he serves as counsel to Music Reports, strategic consultant to its clients, and head of the company's Licensing and Royalty Services divisions. He can be reached at BColitre@MusicReports.com.

[T]he field of music licensing is a highly complex architecture supported in part by relationships, split rights, side agreements and historical antiquities that are inextricably woven into current business models. Therefore, for any legislation to benefit and foster the industry, it must take these realities into account.¹

The Music Modernization Act ("MMA"),² signed into law October 11, 2018, is the most extensive revision of the Copyright Act³ since the Digital Millennium Copyright Act ("DMCA"), almost exactly twenty years earlier.⁴ Every industry probably considers itself complex in its nuances, but the Copyright Office, when describing the § 115 Reform Act of 2006 ("SIRA") to the House Judiciary Committee, suggested that "the sheer number and complexity" of issues in music licensing "render a holistic solution improbable, if not impossible."⁵ SIRA's attempt at a relatively narrow solution had failed to attract consensus among rights owners in the music industry (performing artists and composers, music publishers and record labels, digital music services, etc.) on how to address certain problems, and what resulted twelve years later was an omnibus approach carefully constructed to balance at least some of the needs and interests of virtually all constituencies in the music business. This article provides an overview of how this grand compromise came together.

The Lead-Up to Introduction of the Music Modernization Act Bill

There was a traumatic paradigm shift in the recorded music business between 1995 and 2015, from the manufacturing and selling of "sound carriers" (primarily CDs, in 1995 revenue terms) to the licensing of online services that stream music to consumers (primarily on a subscription, on-demand streaming basis, in 2015 revenue terms).⁶ As the recorded music industry has evolved, every constituency in the business has been affected in one way or another, and despite the broad sweep of the MMA, rights owners and rights users will continuously be forced to adapt to an ever-changing landscape as technology drives business model innovation faster than legislators can respond.⁷Nevertheless, occasionally the tectonic stress of compounded technology and business innovations is released in a seismic event, and the stakeholders must do their best to achieve what gains they can while the ground is moving.

Hardly a legislative session has gone by since 1998 when there were not multiple music-related bills in play. During the first half of the 115th Congress alone, a panoply of bills made the rounds on Capitol Hill, each generally seeking to address one or a small set of issues and being promoted by a specific constituency.⁸ As the business of subscription on-demand streaming began to emerge as the obvious engine of future recorded music revenue, however, the most significant challenges to the efficient growth of that business came to the fore of industry concerns.

One of the biggest challenges was that sound recordings tend to be singly owned, and the vast majority of sound recordings (including their separate rights of reproduction, distribution, and performance) can be licensed from a relatively small and organized group of licensors. Musical compositions, in contrast, tend to be owned in fractional shares by multiple parties (e.g., composers, lyricists, and/or their respective music publishers), totaling tens of thousands

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more distinct licensors. Moreover, such licensors tend to vary by rights type, including music publishing administrators for mechanical rights and performing rights societies for public performance rights, compounding the fragmentation. And while in many countries mechanical⁹ and performance rights in compositions are managed by one or, at most, a few collective management organizations, no such collective exists to manage mechanical rights in the United States. Further, there is no database that contains perfectly complete and accurate records of every composition ever written, because thousands are written every day, and there is an active secondary market for those with established value.¹⁰

Further compounding the difficulty of identifying, locating, and obtaining licenses to the fragmentary shares of the songs embodied in recordings has been the urgency to do so in extraordinarily high volume. To make the marketing case that consumers should subscribe to the "jukebox in the sky," digital music provider services ("DMPs") felt compelled to offer virtually every single sound recording in existence. This encouraged the services to compete with each other in an arms race involving ever larger claimed catalogs of available music, involving tens of millions oftracks.¹¹ Yet consumption data across these services suggested that millions of those recordings are never played by any subscribers, and that 99% of all listening is driven by just 10% of the recordings on the average DMP.¹² Despite the existence of commercially available databases containing tens of millions of sound recordings matched to musical compositions¹³ and the compulsory mechanical license available under § 115 of the U.S. Copyright Act,¹⁴ some services were accused of using sound recordings embodying unlicensed compositions.¹⁵ For roughly ten years, this practice went unanswered by rights owners. Then, between approximately 2014¹⁶ and the very end of 2017,¹⁷ musical composition owners brought a variety of cases for violations of their mechanical reproduction and distribution rights, and the cases rapidly ratcheted from a few involving relatively small, individual rights owners¹⁸ to massive class actions involving complex settlements in the tens of millions of dollars.¹⁹ This was understood to be the primary impetus for what became a major legislative effort culminating in the MMA.²⁰

In early 2017, the National Music Publishers Association ("NMPA") and songwriter representatives began to discuss a solution, eventually bringing in the Digital Media Association ("DiMA").²¹ On October 5, 2017, David Israelite, President and CEO of the NMPA, appeared at the Production Music Conference in Los Angeles and began to publicly make the case for a new approach to mechanical licensing for on-demand streaming.²² By December 21, 2017, with contributions from the Association of Composers, Authors, and Publishers ("ASCAP"), Broadcast Music, Inc. ("BMI"), the National Songwriters Association International ("NSAI"), and the Songwriters of North America ("SONA"), various constituencies in the music industry were able to come together and introduce a bill²³ through the offices of Congressman Doug Collins (R-Ga) around principles underlying a core of four goals:²⁴

1. Reforming § 115 to end the filing of so-called "bulk" Notices of Intent to Obtain a Compulsory License on the Copyright Office, creating a Mechanical Licensing Collective ("MLC") to administer a single-notice blanket license, and mandating the creation of a transparent and publicly accessible database housing song ownership information;
2. Changing the standard by which the Copyright Royalty Judges determine royalty rates for the compulsory mechanical license from the so-called "801(b)" standard to a so-called "Willing Buyer/Willing Seller" standard;
3. Ending the practice of assigning all cases interpreting the ASCAP and BMI Consent Decrees ("Rate Court Proceedings") to designated judges in the U.S. District Court for the Southern District of New York and replacing it with a "wheel" system that ensures that each Rate Court Proceeding will be assigned to a different judge; and
4. Repealing § 114(i) of the Copyright Act, which prevents judges in rate court proceedings from considering evidence of sound recording performance rates that might affect the judges' valuation of the arguably analogous performance rates for musical compositions.

A less publicized, but critically important provision of the MMA, as the statute became named, was a limitation of DMPs' liability for past infringement, which would now be limited to the statutory royalty rate for any actions not brought prior to January 1, 2018.²⁵ Considering the potentially staggering impact of statutory copyright infringement damages, this limitation provided an enormous incentive for the DMPs to come to and remain at the bargaining table.

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Neither the rights owners nor DiMA included this aspect of the bill in their public statements. Nevertheless, given the background of lawsuits motivating the DSPs, limitation of liability was clearly a core aspect of the quid pro quo of the architecture of the legislation. Only one independent music publisher, Wixen Music Publishing, Inc., reacted by filing a preemptive lawsuit, which it did just under the wire on December 29, 2017.²⁶

As explored below, during 2018 the principles underlying the core set of goals were refined and joined into an omnibus bill including the CLASSICS Act²⁷ bill and the AMP Act²⁸ bill, weathering criticism and outright challenges along the way to eventual passage on October 11, 2018.

The Bill's Progress

While the bill's organizing principles (and the liability limitation provision) were eventually incorporated into the statute as enacted, from the day of its introduction the bill had to struggle through a gauntlet of interested-party challenges. How each challenge was surmounted varied according to the particular players and their interests.

On December 21, 2017, the Songwriters Guild of America, Inc. ("SGA")²⁹ lodged the first complaint. Noting that the SGA had been provided a draft copy of the bill only the day before its introduction in Congress, the SGA argued primarily that the proposed MLC did not...