Music Modernization Act Becomes Law – Mechanical Rights To Become Easier Just As Performance Rights May Become More Difficult

David Oxenford - Color
David Oxenford

By: David Oxenford, Wilkinson Barker Knauer LLP

Last week, after passage by both chambers of Congress and signature by the President, the ‘‘Orrin G. Hatch–Bob Goodlatte Music Modernization Act’’ became law. The law underwent a few changes on its journey to approval, adding new provisions in the Senate to those which we summarized here upon its initial passage by the House. The Act retained its same principal purposes. The driving force behind the Act was the desire to simplify the payment of “mechanical royalties” by digital music services for the reproduction and distribution of the millions of musical compositions that they use in the songs that they serve up to more and more consumers across the country. That simplification was accomplished through the creation of a new collective through which these royalties will be paid – essentially a one-stop shop where the statutory royalty will be paid. The collective will have the responsibility for finding the copyright holders and songwriters who share in the royalties – removing the need for the music services to have to identify and pay all of the appropriate rightsholders, a process that has resulted in legal claims for hundreds of millions of dollars against these services for not being able to find all the parties who are supposed to be paid for the mechanical royalties.

The general layout of the system for dealing with the payment of these royalties, through a collective to be established, remains essentially the same as in the initial House Bill. Other provisions were added in the Senate (and then approved again by the House) dealing with matters including pre-1972 sound recordings, Sirius-XM royalties, and the ability of existing music organizations to continue to do direct licenses for mechanical and other rights outside the new statutory system. We may write about those issues later. But the Senate addition likely to have the most significance for the most music users was one having nothing to do with mechanical royalties, but instead with the performance royalty for music works (musical compositions) that is paid by music services, radio stations, bars and restaurants and any other location that plays music that is heard by the public at large. The new language added by the Senate requires that, before the Department of Justice recommends any changes to the consent decrees governing ASCAP and BMI, the DOJ must first notify Congress of any changes that it will be suggesting to the courts that administer the decrees, so that Congress can decide if it wants to take action to block or modify any such changes. Why is that significant?

Performance rights in the United States, until a few years ago, were relatively straightforward. Music users paid royalties to ASCAP, BMI and SESAC, and then pretty much were free to play almost any song that they wanted to. Sure, there were occasional issues over whether the royalties charged by these performing rights organizations (PROs) were fair, and having three PROs in the United States was two more than existed in most other major countries, but nevertheless the system generally worked especially as ASCAP and BMI, by far the two largest organizations, were governed by antitrust consent decrees overseen by U.S. District Court Judges in the Southern District of New York. These two PROs could not raise rates without the prospect of a rate court proceeding to determine if their proposed rates were fair. So, while there was no one-stop shop to which royalties were paid for the public performance of musical compositions, the three legacy PROs effectively provided a statutory license system without any statute having been adopted.

But, as we have written many times, that system is beginning to break down, as major publishing companies have threatened to withdraw their catalog from ASCAP and BMI to license it themselves (see our articles here and here), or as new PROs, like GMR, have been established to try to get higher royalties for the musical works to which they have rights. While there has been one lawsuit against GMR to try to bring it under some antitrust regime (and similar successful suits against SESAC which had never previously been subject to antitrust constraints, see our articles here, here and here), the pressures to splinter the performing rights licensing in the US has continued to grow. We wrote about some of the concerns that could arise with the splintering of performing rights organizations, especially given the often fractured nature of the ownership of copyright in musical works, here.

Further increasing the concerns about changes to the performing rights marketplace have been the numerous statements from the current head of the Antitrust Division of the Department of Justice that he does not believe that the Department should be setting regulations for industries through long-term antitrust consent decrees – that such regulations should be the role of Congress or administrative agencies. It has been made clear that these statements specifically include the ASCAP and BMI consent decrees, as they are among the consent decrees that have been in place for the longest period of time.

It would certainly be ironic for the Music Modernization Act to fix mechanical royalties by creating a one-stop shop for royalty payments, just as the performing rights licensing process was splintering. One complicated long-term problem would have been fixed, just as what was a relatively stable marketplace appears to be becoming more unstable. It was therefore important that Congress put this check on the DOJ taking action to further free the PROs from their current restraints. Of course, were Congress notified of the desire of the DOJ to make changes, it is an open question whether Congress could adopt a new statute to take the place of the current consent decrees in the time-frames set under the new Act. Given that many of the last-minute changes that were necessary to assure passage of the Music Modernization Act to relieve concerns of specific companies in the music industry, any reform of the performing rights process is likely to include even bigger players in the industry with even more entrenched interests that could take a long time to resolve. But at least Congress has the ability to put a check on the action – and these issues may well need to be resolved in the Music Modernization Act, Part II.

David Oxenford is MAB’s Washington Legal Counsel and provides members with answers to their legal questions with the MAB Legal Hotline. Access information here. (Members only access).

There are no additional costs for the call; the advice is free as part of your MAB membership.

Leave a Reply

Your email address will not be published. Required fields are marked *