United States: The Music Modernization Act: What Licensee Services Need To Know About Its Implementation

Having passed both the US House and Senate, the Music Modernization Act ("MMA") is about to be signed into law—a signing ceremony is scheduled for today. It will effect a sweeping overhaul of the compulsory mechanical license mechanism set forth in 17 U.S.C. §115—among other significant changes. While many in the industry have been closely following the bill as it worked its way through the legislature, the following provides an overview of key terms—and important dates—regarding the mechanical licensing procedures under the new law that every digital music service provider should know. Importantly, though many aspects of the new system require further regulation and many months (or even years) before they are effective, certain licensee obligations will begin as early as next month.

I. Overview of Key Changes to Mechanical Licensing

  1. Blanket License Administered by Mechanical Licensing Collective
    A primary feature of the new law is the creation of a blanket license for the mechanical rights implicated in interactive digital streaming and a mechanical licensing collective ("Collective") to administer the license and the associated royalties and administrative fees to be paid by the digital music service licensees. The blanket license eliminates the need for digital services to obtain licenses on a song-by-song basis through the Notice of Intent ("NOI") procedure under section 115 of the Copyright Act. It also discontinues the process of filing NOIs with the Copyright Office in situations where the copyright owner could not be located.  

    The blanket license covers all musical works (or shares of such works) available for compulsory licensing for purposes of covered activities, including interactive streaming and all copies/distributions made in connection therewith. The Collective is to be designated by the Register of Copyrights, and will have broad authority to establish and administer a centralized musical works database, collect and distribute royalties from licensees, and provide information for use in rate-setting proceedings. The Collective will also have a dispute resolution committee and an unclaimed royalties oversight committee.

    On the License Availability Date (which will likely be January 1, 2021), the blanket license will be automatically substituted in place of any preexisting compulsory license—and all compulsory licenses under the prior statute will expire. There will be no remaining compulsory license other than the blanket license after the License Availability Date.

    Once the blanket license is in effect, licensee music services must report usage and pay royalties on a monthly basis, due to the Collective 45 days after the end of each monthly reporting period. Upon receipt of usage reports and payment, the Collective will distribute the royalties to copyright owners in accordance with usage information. For royalties that cannot be distributed (for unmatched works or works subject to ownership disputes), the Collective is to deposit the royalties in an interest-bearing account. Royalties for unmatched works are to be held for three years and then distributed by the Collective to known copyright owners pro rata.
  2. Exemption of Voluntary Licenses
    Under the MMA, licensees under the blanket compulsory license need not pay royalties to the Collective for uses of a musical work that are covered by a voluntary license. The statute defines "voluntary license" as "a license for use of a musical work (or share thereof) other than a compulsory license obtained under this section." Note that although there is no obligation to double-pay royalties on those voluntary licenses, licensees must still include those works in the monthly usage reports to the Collective.
  3. Rates and Administrative Fees
    The mechanical rates to be paid under the compulsory license will continue to be set by the Copyright Royalty Board ("CRB") through scheduled rate-setting proceedings, but the standard for determining the rates will now be "willing buyer/willing seller" instead of the previous section 801(b)(1) "reasonable" rate factors.  

    In addition to setting the royalty rates for the compulsory license, the CRB will also, in a separate proceeding, determine the administrative assessments imposed on the licensee services (and on "significant nonblanket licensees") to fund the Collective. The administrative assessments will be to cover the "reasonable" total costs of the Collective and are to be assessed based roughly on the usage by digital music services, in the form of a percentage of royalties payable or some other usage-based metric that will yield "equitable" allocation (and will include a minimum fee for all digital music providers). The assessments may be offset by voluntary contributions made by licensees through private negotiation and agreement.
  4. Implications for Copyright Infringement Litigation
    Other important — but less publicized — aspects of the bill are (1) the definition of "interactive streaming" and (2) the limitation on copyright infringement lawsuits.

    The blanket license under the MMA applies to "covered activities," which is defined as "making a digital phonorecord delivery of a musical work, including in the form of a permanent download, limited download, or interactive stream, where such activity is subject to compulsory licensing under this section." (Emphasis added.) "Interactive stream" is defined as a "digital transmission of a sound recording of a musical work in the form of a stream, where the performance of the sound recording by means of such transmission is not exempt under section 114(d) and does not in itself, or as a result of a program in which it is included, qualify for statutory licensing under section 114(d)(2). An interactive stream is a digital phonorecord delivery." (Emphasis added.) This is generally consistent with past industry practice—digital music services have long been paying mechanical royalties for interactive streaming—but was not necessarily required as a matter of law. Under the MMA, interactive streaming implicates reproduction and distribution rights (in addition to performance rights) under 17 U.S.C. 106.

    While the bill removes this defensive argument, it also significantly limits infringement liability and the threat of litigation in which such an argument might have been advanced. A digital music provider that obtains and complies with the blanket license will not be subject to infringement actions. Moreover, for any copyright infringement action commenced against a digital music provider after January 1, 2018, for unlicensed use prior to the License Availability Date (i.e., within the next two years, roughly), the copyright owner plaintiff will only be able to recover royalties owed, and no other damages—removing the specter of (arguably draconian) statutory damages that has driven copyright infringement litigation over the past several years. 

    In order to be protected by the limitation of liability, existing digital service licensees must comply with certain conditions during the time period commencing 30 days after enactment and running through the period 90 days after the License Availability Date (which will be April 2021). These requirements include certain specified matching efforts. If the copyright owner is identified, the service shall provide a statement of account and pay royalties in accordance with the pre-blanket license regulations until the License Availability Date, after which the royalties and usage report are transferred to the Collective. If the owner is not found, the service is to accrue the royalties until the License Availability Date and then transfer the accrued royalties to the licensing Collective.

    Note that a service that "defaults" under the MMA and does not cure the default within 60 days of written notice will have the blanket license terminated; the service may then be subject to infringement liability and all remedies under 17 U.S.C. §§ 502-506.  Default can be caused by failure to provide complete and accurate monthly usage reports and payments, failure to pay administrative fees, and other non-compliance with the terms and conditions of the blanket license.

II. Important Dates

A number of issues remain to be resolved following enactment, and several details have been specifically reserved for the Register of Copyrights to determine through regulation—including the form of the new "notice of license" and regulations concerning usage reports. In the meantime, below is a brief timeline of important dates for licensees to keep in mind:

  1. Date of enactment: Upon enactment of the MMA, the Copyright Office will no longer accept NOIs (and NOIs filed with the Copyright Office prior to the enactment date will not provide licensing coverage after the License Availability Date).
  2. Enactment + 30 days: Compliance with requirements to take advantage of the limitation of liability. In order for a licensee to avail itself of the limitation of liability, it must comply with requirements between this date and April 1, 2021 (90 days after the License Availability Date). The requirements include engaging in certain matching efforts, including through a bulk electronic matching process, repeated every month with respect to unmatched compositions and other requirements regarding statements of account, royalties, accruals and transition to the Collective following the License Availability Date.
  3. Enactment + 90 days: Due date for publication of notice in the Federal Register soliciting information to identify the appropriate entities to serve as the Collective and as the Digital Licensee Coordinator.
  4. Enactment + 270 days: Due date for:

    • The Register of Copyrights to designate the Collective and the Digital Licensee Coordinator, if any (designations to be reviewed every five years after the initial designation); and
    • The Copyright Royalty Judges to commence a proceeding to establish the initial administrative assessment by publishing a notice in the Federal Register seeking petitions to participate.
  5. January 1, 2021: License Availability Date (substitution of blanket license and expiration of prior compulsory licenses).

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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